Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 11 - Evidence - Morning sitting
OTTAWA, Tuesday, April 21, 1998
The Standing Senate Committee on Agriculture and Forestry, to which was referred Bill C-4, to amend the Canadian Wheat Board Act and to make consequential amendments to other Acts, met this day at 9:08 a.m. to give consideration to the bill.
Senator Leonard J. Gustafson (Chairman) in the Chair.
The Chairman: We are pleased to have before us this morning Mr. Lorne Hehn, who is no stranger to this room or to agriculture. With him are Mr. Earl Geddes and Mr. Brian White. Welcome, gentlemen.
We have had very effective hearings at six locations on the Prairies. There has been no lack of enthusiasm. We heard from 110 individual farmers and 30 farm groups, as well as the ministers of agriculture from Saskatchewan, Manitoba and Alberta.
There has been good attendance by senators at all meetings and I commend my colleagues for that.
We have had good discussions. I would like to say that we always agreed, but Senator Hays would not go along with that.
This morning, we will have a 40-minute presentation from the Canadian Wheat Board, after which we will have an opportunity to ask questions.
I wish to welcome our distinguished Speaker of the Senate, Senator Molgat, to our meeting this morning.
Please proceed, Mr. Hehn.
Mr. Lorne F. Hehn, Chief Commissioner, Canadian Wheat Board: Thank you, Mr. Chairman. Good morning, honourable senators. We at the Wheat Board welcome this opportunity to meet with you and appreciate the generous amount of time that you have allotted for us. This is an opportunity not only to talk about Bill C-4 but also to share our vision of grain marketing globally. We are a global organization.
I was intrigued by your remark about your colleagues being in agreement. You and I, Mr. Chairman, have farming backgrounds. We still own our farms. There is a saying to the effect that when you have three accountants in a room, you have a partnership; when you have three business people in a room, you have a company; and when you have three farmers in a room, usually you have a debate.
I will say a word about what the people with me this morning do at the Wheat Board in order that you will understand their background. They will assist me in dealing with the issues this morning.
Mr. Brian White is the director of our market analysis department and is also acting head of corporate policy at the Wheat Board. In this capacity, he heads up all our market intelligence work, our market surveillance work, our weather and crop surveillance work, and also the corporate policy, analysis and research work. That is a heavy responsibility.
Mr. Earl Geddes came to the Wheat Board a couple of years ago. He has a farm background and was president of Keystone Agricultural Producers for a number of years. Mr. Geddes has made a tremendous contribution on the value-added side and is currently our value-added program manager. Since coming to our organization, he has successfully put together two major conferences on the Prairies dealing with value-added opportunities in that area. His work is in the market development department. The emphasis is on the domestic market with particular responsibilities in the value-added sector.
Although I was not in Western Canada when your committee travelled there, which is one of the reasons I did not appear before you there, I received many of the submissions that you received. Wheat Board people attended the hearings and I have also looked at the press coverage. Having seen all of that, I agree that the focus was very much a farmer focus. However, much of your discussion centred on the area of activity which I call farm to f.o.b, or farm to salt water, or farm to processing plant. That was very good, but I believe that when we deal with the future of the Wheat Board we must also deal with the big picture. This morning, I want to spend some time on the scope, size and complexity of our business as well as on the sophistication of this business, being a global company in a global world.
We also want to spend some time responding to concerns raised during your hearings out west. In going through the submissions, I found that there were many concerns in the value-added area. How we price in the domestic market seemed to be a contentious issue as well as how we establish the buy-back price at the border. Organics was an issue. We also want to spend some time on the dual market and single-desk issue.
I am sure that you will have many questions following our presentation. Our purpose is not to sway opinion; it is to give you additional information on which to base opinion.
As I said at the outset, I want to focus on the business from the perspective of the big picture. I am speaking of the perspective of the customer. I will conclude with some remarks at the farmer/stakeholder level.
I believe that our customers or competitors think that they are doing very well. The customer survey of the Western Grain Marketing Panel shows that from a product and a service perspective we have a very good report card. It is not so good in terms of price, because they naturally would like the price to be lower. However, from a competitor perspective, all the recent discussion about us has been in the area of state trading enterprises and why we have to weaken them. That is not surprising because our competitors do realize that we are a very dominant force in the world marketplace and they would very much like to weaken that force.
It is important to underscore as well that we are a global marketer operating very much in a global marketing environment. Only 10 per cent of our sales activity in 1996-97 was in the domestic market. That is not surprising with regard to Western Canada's tremendous capacity to produce and the fact that we have less than 30 million people to consume our product. We have to export and we are a big exporter.
The world marketplace for grains is highly competitive. It is a very volatile environment. The reason that it is volatile is, first, that only about 20 per cent of the world's wheat production actually trades. Therefore, any small shift in world wheat production, which we are certainly seeing, and saw last year, creates tremendous pressures on price.
Second, there is still a huge element of government intervention in the marketplace. The Europeans still have a support mechanism in place which gives farmers approximately $400 a hectare each and every year in a separate cheque. They call it "blue box," but it still has a huge impact.
Third, in addition to being highly competitive, the marketplace in which we deal is also highly concentrated. There are only a handful of players in the world wheat trade. Do not let anyone tell you anything different.
Of that handful, I can think of Toepfer in Germany; Dreyfus in France; Glencore in Switzerland; Bunge in Latin America; Cargill, Continental, ConAgra and ADM in the United States. If we add in two or three or four of the big Japanese trading arms like Mitsubishi, Mitsui, and Nissho-Iwai, you pretty well have 95 per cent of all the trade that is out there. It is highly concentrated.
It is also important to underscore that you must be big to compete out there. The marketed tonnage and dollar value of sales of the Wheat Board makes us the largest wheat-exporting company in the world and the largest barley-exporting company in the world. That should give you an idea of the size of business we are discussing this morning.
In 1996-97 the Wheat Board represented almost 20 per cent of the world's trade in milling wheat. In malting barley, it represented a little over 30 per cent of the world's trade. As well, it represented a full 62 per cent of the world's trade in durum wheat. We are a dominant player in the world marketplace. We did business in over 70 countries last year, and our gross sales revenue in Canadian dollars was $6.1 billion. That makes us one of the 30 largest business corporations in Canada. I believe the last time I looked, we were number 25 on that scale.
We are Canada's fifth largest exporting company in terms of dollar value of export sales. Only the three car manufacturers and IBM are ahead of us. Even though we are fifth, we are Canada's largest net earner of foreign exchange.
We are the fourth largest issuer of commercial paper in Canada and, leaving governments aside, the second largest borrower in the Canadian economy. The grain business is a capital-intensive business and hence the need for that kind of borrowing.
We are the second largest Canadian borrower in the U.S. commercial paper market, second only in that market to the Government of Canada itself. The business, compared to most manufacturing export businesses, is also highly complex. It starts with the fact that we have something like 105,000 to 110,000 production or manufacturing units. Each unit produces five or six different products, each with several different quality variations.
Compared to most businesses, the grain business is highly complex in that it consists of a large number of major players who have been working together in this highly integrated Team Canada approach. This team has functioned very well. There are 110,000 manufacturing plants on the one side and a huge number of very large team players on the other side to bring this all together.
Those 110,000 manufacturing plants have only one production run per year, which is quite different from most manufacturing businesses. At the same time, we maintain quality, consistency, uniformity and we follow some very rigid food safety and phyto-sanitary standards. We move it into about 1,100 elevators and assemble it into train-load lots of 90 to 100 trains to meet the shipping requirements of our contracts as vessels arrive. We load, on average, three to four vessels per day. These vessels average from 30,000 to 70,000 tonnes. One 70,000-tonner equates to the entire handlings of one of our largest stations in Western Canada for an entire year.
We have far less storage capacity and, hence, less working capacity in our system than any other country in the world, given the amount of our through-put. We have the storage figures to back that up. We are further from port than any other country in the world. We have a huge mountain barrier going west. We have only three to four months of shipping going north. We have only nine months of shipping going east and, again, a huge land-water barrier to overcome. In addition, we export most of what we grow.
Mr. Chairman, it takes a lot of cooperation and a lot of coordination to bring all of the logistics, the production and the marketing together. In doing that, we have been able in Canada to, at the same time, maintain a product focus. That is very much different from our competitors. They are still very much in the commodity business. A number of years ago, we, in Canada, moved from our registration system and our quality system to a product business. Some of our competitors have some catching up to do.
We also have a service focus which is quite different from that of our competitors. Mr. Geddes will get into that with you. We provide a complete technical services package and a complete educational package to our customers. We utilize organizations like the Canadian International Grains Institute to do that for us.
It is important to keep in mind the breadth and the scope of the business and the organization you are examining when you consider this bill. It is big. It is important. It is complex and highly sophisticated.
For eight years, I was chairman, president and chief executive officer at United Grain Growers. In the ninth year, I was Chairman and president. My job as chief commissioner of the Wheat Board is far bigger and far more encompassing than my job for the Canadian wheat growers. Perhaps that will give you a feeling for the size and complexity of this business.
From a global customer perspective, I must also mention that we cover customers from a wide variety of cultures, religions, political regimes and economic conditions. Our customer base is very diverse from ethnic, political and economic perspectives. We traverse all those boundaries. Whether it be a dictatorship or military rule, a communist country or a democracy, we do business with every country. From a religious perspective, whether it be a Muslim, Christian, Buddhist or an atheist country, again, we do business in all of them. Whether it be a third world country, a country in the developing world or even a developed country in the highly industrialized part of world, such as the country where you and I live, we do business in all of them. To be an effective marketer we must meet the different needs of those different customers in those different environments. Believe me, they are quite different.
Durum wheat, for example, in a country like Algeria, is used for a product called "couscous." We think of durum wheat as a macaroni or spaghetti wheat. It is used for a different purpose in Algeria. That is just one example.
We are in a highly competitive, highly volatile marketplace, especially from the pricing and marketing perspectives. Let there be no mistake: there is still a lot of government intervention in the world wheat marketplace.
Some customers have a very sophisticated consumer base. Japan is probably the best example in that area. Not only are they very sophisticated, but food safety is becoming the number-one issue on their agenda, and that is in addition to their absolute demand for quality products. They do pay a premium for that. For example, we now do in excess of 40 chemical residue tests on every cargo of wheat that moves into Japan.
Customers like the Japanese, the Koreans, the British, the Italians, the Americans and the Canadian millers right here at home want, expect and require a safe, high-quality, consistent and uniform food product, and they are willing to pay for it. Others do not require the same level of sophistication, depending on the country we are looking at, nor are they interested in all of the technical service packages that we can provide.
Nevertheless, even in those countries, we have had a number of occasions when perhaps, as the wheat unloaded and went into the mill or bakery, it was not doing what it should have been doing. We sent in a technical team of experts to overcome those problems, even though these people are not as sophisticated.
Given this diverse global customer base, the Wheat Board provides a significant set of products and services to specifically meet the needs of its customers in those more than 70 countries across the world.
Here at home, in terms of the relationship we have with farmers, I think it could be generally agreed that, in the past, we provided all farmers with essentially the same element of marketing services. However, like our diverse customer base, farmers' needs today are also much more diverse, demanding, and complex than they were when I began farming in 1957. Today, there continues to be a large and significant group of farmers, and you heard from them, who believe in and are completely satisfied with the current system of marketing -- that is, the Wheat Board, initial payment, adjustment, interim and final payment system, supplemented by a cash advance program.
However, there are also farmers in Canada today, and you heard from them as well, with much more demanding cash flow and marketing requirements. As input costs continue to escalate and markets become even more volatile, the cash flow needs of many of these farmers take on an even more significant and key importance than just a few years ago. To address those cash flow and other needs, the Wheat Board, since 1992-93, has held an extensive series of meetings, consultations and focus groups directly with farmers, to talk about how we might look at putting more flexibility into the pricing and cash flow mechanism and the needs of farmers.
The findings of those meetings and consultations were reflected in our submission to the Western Grain Marketing Panel. In that submission, we outlined the eight basic points that we felt needed to be focused upon, and they are also in our submission to you this morning.
I was away from Western Canada at the time of your hearings out there, but I have read all about them. I received a number of the submissions. One particularly stuck out in my view: a submission by Don Tate, a farmer from Melrose. I mention this because, in reading Mr. Tate's submission, he represents the core of silent farmers out there who have not been speaking up very much. It might be worth your while to review what he said.
I can only conclude, from the submissions, the news reports and the reports of our people who attended the sessions, that this debate has polarized to the point where I wonder how productive it is to have it continue. It is not unlike the gun legislation. At some point in time, you must make the decision. There will be fallout from this decision, but it is time to pass the bill. However, we also must ensure that we charge the new board with the responsibility of future policy and operational strategy.
As well, the more I hear the highly polarized views of both ends of the spectrum, the more I believe that it is fair to say that Bill C-4 has, to a large degree, struck a reasonable and important balance between the obvious needs to put in some operational flexibility and, at the same time, to protect the very important pillars of single-desk pooling and the government partnership.
From a governance perspective, there are also conflicting viewpoints. To suggest, as some have in their briefs and submissions, that government not have some element of direct involvement is simply not in the cards; we need government involvement for three basic reasons. Farmers need the government partnership for the same reasons. You know about the financial backing and the initial payment area. You know about the guarantee of repayment on our borrowings and how we are able to leverage on our very excellent credit rating, which is in part because of this guarantee. You know that last year alone it provided over $80 million of direct savings to farmers in our pool accounts at absolutely no cost to the taxpayer. There are many indirect savings as well, because the elevator companies also borrow to cover Wheat Board inventory and piggyback on the Wheat Board guarantee. There is a saving there too. You know that the government also provides for the very important competitor creditor packages.
From my perspective, I believe that it would be foolhardy to distance this business from government -- to weaken the partnership with government precisely when we are looking at things such as the Asian crisis and wheat prices that will bottom out this summer at very low levels. We need that government partnership, and we need to strengthen it rather than weaken it.
In your deliberations, I trust you will conclude that the federal government partnership is necessary. It is necessary to keep Canada competitive, and it is necessary in terms of being an important tool in the farmers' marketing tool box.
Let us also accept that farmers clearly want a more direct role in determining the policies and the strategies of our business organization. In order for that to happen, obviously the reporting structure must change somewhat. Clearly, the choice of farmers is for there to be a board of directors. I have not heard much in the last four or five years other than that a board of directors is the best way to do this. They have argued about whether they should be elected or appointed. They have argued about how many government appointments should be on the board. However, they have agreed upon the notion of more accountability through a board of directors. They clearly want a direct role in determining the policy and the strategic direction of the board.
The challenge is how to do that and still maintain this very important government partnership and, more than that, maintain the trust that must be redeveloped between the government and farmers. Obviously, as some of these submissions indicate, there has been a lack of trust. I do not place all of the blame for that on the government either. Like any other organization, we are bureaucratic too at times, and so are the big companies like Cargill, Continental, and ConAgra, but we must all work together to redevelop that trust.
In conclusion, honourable senators, I have heard this statement many, many times in the last four to five years: "Lorne, I support the Canadian Wheat Board and the marketing system, but you have to change the structure, and you have to be more flexible to our cash flow requirements."
We need to look at governance changes, and we need to look at more modern marking tools, such as a forward-pricing option or a pooled cash-out option, or the two other options we have mentioned, the tradable producer certificates and the pool equity loan option. Those last two options would certainly be no risk to the single-desk or the pool accounts. The risk would fall back on the farmers' shoulders, but it would address the cash flow issue.
Bill C-4 allows for these things to happen. It also allows that clearly the new board will be challenged to monitor and ensure that, when they bring in these new, flexible marking tools and put them into place, they are not jeopardizing the single-desk or pooling and the very important government partnership. Bill C-4 does contain the necessary tools, and it is, to a large degree, what farmers have been asking for.
I am seeing and hearing that many people would like to prescribe in legislation what this board of directors should be doing. You may find that a useful approach, but I believe accountability goes both ways. If farmers want the board to be accountable to them, then there must be accountability by farmers back to board. It goes both ways, and you must allow some flexibility. Allow the board to decide on the flexible options and then hold it accountable back to the farming community.
I have been involved in farm policy in a very direct way since 1967. I fail to see how much more there is to be gained by debating these issues. I am hearing the same debates over and over again. If we do not move soon, the group who would like to see the Wheat Board system gone, or at least weakened, will gain momentum. It is fashionable to say today, "get the government out of my business," but in the grain business it is not very practical to follow that kind of rule.
It is also trendy in society today to say, "I want choice, I want to be an individualist, I want some independence." However, in dealing with 70 countries, across cultures, political regimes and economic conditions, it is smarter to work together and in partnership with the federal government. The whole is always greater than the sum of its parts, in spite of what some may say out west. The whole is always greater than the sum of its parts, and nowhere is that more evident than in the grain business. The value of the solid Team Canada integrated partnership approach that we have taken in grain marketing is the envy of the world as is our quality system and our quality products. Our challenge is to build on those building blocks.
I will close my portion of this presentation with an analogy. I have always been amazed by stone archways. In Europe particularly, some of the old stone archways have been standing for several thousand years. I always marvel at the workmanship that has gone into them. However, there is a stone in every one of those archways called a "keystone." If you remove a stone or even weaken it the archway will crumble. The Wheat Board has been the keystone to the farmer's archway to world markets. I urge this committee to be very cautious and careful in its deliberations on the Canadian Wheat Board because if the keystone crumbles, the farmer's archway to world markets crumbles.
I will now turn things over to Mr. Geddes. I believe the committee members have a number of questions about our business in a relation to the domestic and the U.S. market. I will let him walk you through several slides in that area. Then we will turn it over to Brian White, who will deal with the operational concerns we would have with a dual market scenario.
Mr. Earl Geddes, Program Manager, Market Development, Canadian Wheat Board: Honourable senators, in preparation for this morning, I have brought some specific examples of how we do our domestic pricing in the industry in Canada, how we work with the organic industry and the buy-back process. I will present a series of overheads. We can return to any one of them in the time allotted for a question period.
I should like to make reference to the transcripts of hearings on Bill C-4 held in Brandon, Manitoba, on March 24, 1998. The presenter was Kevin Archibald from the Western Canadian Wheat Growers. He referred to Mr. Pizzey's flour mills. He said that flour mills like Mr. Pizzey's in Western Canada basically pay the price of wheat in Minneapolis, which is the main milling centre for the world, and especially for North America, plus freight from Minneapolis back to whatever point in the Prairies there might be. He said that there is not a premium captured by the Canadian Wheat Board for producers selling to the Canadian producers and that the further you are away from Minneapolis, the more you pay because of freight.
He is referring to the domestic milling industry. I will demonstrate what really happens.
Mr. Pizzey, in the same hearing, commented that it has been stated by many people and groups in Western Canada that we do not have to destroy the Canadian Wheat Board to make this thing work. Mr. Pizzey indicated that the processing industry cannot co-exist with the Canadian Wheat Board but that that does not mean we have to destroy the Canadian Wheat Board.
Those two comments are what you heard in many of the hearings in Western Canada. What I would like to do this morning is to take you through precisely how we work with the industry and how we arrive at our domestic price.
With domestic human consumption pricing, DHC pricing, we sit down with the industry -- the Canadian industry in 1996-97 was our single largest customer for Western Canadian wheat -- with the industry and work out a pricing scenario that represents North American competitive pricing. The reason we do that is because we are actively trying to encourage increased investment in the Western Canadian industry. We wish to ensure that any investment decisions made in the wheat processing industry are based on sound market fundamentals. We use the Minneapolis Grain Exchange as our principal pricing point.
The domestic human consumption price is for flour milling and for human consumption in Canada. We have a North American Canadian competitive price so that mills within Canada are priced competitively relative to their location to the marketplace. We have competitive pricing for export business. If Canadian mills wish to look at an export flour market, we will look at that market and price the wheat according to a mill that wants to put flour into the same market, so long as producers are still receiving a fair market value for the wheat they would get in the marketplace.
We provide a supply assurance to the mills in Canada. The mills in Canada will book with us, on a 12-month basis, the wheat quantities they will require throughout the year, along with the qualities, grades and protein levels, and we will not move the grain away from the relative location or we will ensure that it is available in Thunder Bay for the eastern mills. We do risk protection for the mills, which is six-month pricing basis contracts or any number of issues that deal with pricing.
This gets very detailed and it is relatively complex, but we are trying to create a free market pricing system inside of a regulation, which I am sure you have been told is impossible to do, but I have even had the deputy minister in Alberta tell me that this is about as close as you can get to the open market in a regulated environment. We start with the Minneapolis wheat futures market on a daily basis. These prices are published daily and are available to the mills on a daily basis. There are clear price discovery mechanisms in place for the Canadian mill.
We consider Dark Northern Spring, DNS, 14 per cent protein equal to No. 1 CWRS 13.5 per cent protein because the protein in the U.S. is measured at a 12.5 per cent moisture basis and in Canada it is measured at 13.5 per cent moisture. Therefore, 14 per cent in the U.S. is equivalent to 13.5 in Canada. That gives you a U.S. price per bushel in Thunder Bay of $4.27. The price per tonne in Thunder Bay in U.S. dollars is $156.99; in Canadian dollars at Thunder Bay, that translates to $225.96. We will trade the exchange rate on a regular basis to supply that assurance to the domestic mills so that they can lock in those kinds of risk protection factors as well. This basis over the Minneapolis futures is the basis in the wheat market at that time, which we will lock in for a mill for up to six months if they choose to do their risk protection on that side and leave the pricing side open; otherwise, we can lock in the whole price for them if they choose to do that. This is really for the eastern catchment area. The western wheat market, as you know, is divided into a eastern and western catchment area, based on the freight cost of moving to either Vancouver or Montreal.
The western catchment area has an additional cash basis and this is the Dark Northern Spring basis that is traded at the West Coast, at Portland, again, out of Minneapolis. It is equivalent to approximately 35 cents U.S. a bushel, which is $17.93 Canadian a tonne. There is therefore a price basis in Vancouver from which mills in the West Coast catchment area are priced off. We will trade or lock in the basis with them, sell them the basis, protect ourselves and them in the marketplace so that they have very clear price discovery and risk-protection mechanisms that many mills in the United States may not be able to get as far as six months out.
Mr. Hehn: We are one of the largest players on the Minneapolis Grain Exchange. That fact might surprise some people around this table.
Mr. Geddes: We will play about as much as they will let us, always being long with wheat stocks.
Senator Whelan: You mean it is not a free market as much as you would like.
Mr. Hehn: You have that right.
Mr. Geddes: To go back to Kevin Archibald's point, the tracked Vancouver price, which is used by mills in the West Coast catchment area, such as Saskatoon, Lethbridge, and Swift Current, is developed in the same way. We take the U.S. freight equalization to create a North American price. We have to consider the U.S. freight rate because ours is a regulated rate. Their current freight rate in the West Coast catchment area, which is from Great Falls to Portland, is $21.25 Canadian higher than our freight rate in Western Canada. We deduct that to ensure a mill in Swift Current is economically competitive, that is, it is buying wheat on a competitive basis with a mill in Montana. Then we subtract the Canadian freight rate, $32.82, to come to the mill price, not, as Mr. Archibald suggested, adding the freight on from Minneapolis. We are not subtracting just a regulated Canadian rate but a competitive North American rate to ensure that the Canadian mill is competitive on a North American basis, and that the investment in the mill is, in fact, sustainable. If the Wheat Board did not exist, the price would be the same. Investment opportunities are very clear for the millers. In fact, many mills in Western Canada are considering additional investment at this time.
That is the domestic human consumption price. We also have a non-human consumption price, or NHC pricing, which is for fractionation. This is for starch and gluten plants where they fractionate the wheat, separating the gluten from the starch and making gypsum board from the starch or pet food from the gluten. It is almost an industrial type of pricing. The difference is that we are not charging the milling wheat basis in Minneapolis. They are using non-milling grades of wheat for non-human consumption pricing, which includes any grades other than No. 1 and No. 2 CWRS.
To ensure our domestic industry is up and running at every opportunity, we also have an exemption for livestock feeding. Livestock feeders do not go to the board to buy their grain.
The ethanol industry, which is using the distillers' dried grains, does not have to go through the Canadian Wheat Board. The ethanol industry operates entirely outside of the board.
Another key part that is not well-understood, and maybe was not well-represented in some of your hearings from the minutes I read, was the farm mill exemption. At one point, farmers were able to mill over 50 bushels of wheat for their family. That is no longer the case, although I think some people told you that. Farmers, and it could be yourself, Mr. Chairman, with 15,000 or 20,000 bushels of wheat, can mill all of that wheat on their farm, in a mill they control, and sell it anywhere in Canada. We have created an interprovincial movement licence at no charge to the producers, and farmers can market all of their own grain freely through their own processing plant anywhere in Canada, without going through the Canadian Wheat Board. There is no buy-back and no trucking to the elevator.
The Chairman: Is a licence required to do that?
Mr. Geddes: It is necessary because of the way the act reads regarding the movement of processed wheat products between provinces. The producer simply makes an application to the Wheat Board, and we send this interprovincial movement licence to the producer. It also provides a check for the Wheat Board to ensure it is not being abused and that some producer is not milling he grain of half a dozen neighbours in that mill, because that would be unfair to the domestic industry.
Under that scenario, in 1996-97, Canada was our single largest customer for Western Canadian wheat growers. This year, I believe, Iran will overtake Canada, because we had a tremendous year of marketing wheat into Iran. However, up to this year, Canada has been our single largest customer. We supply all of the flour this country uses, and we are exporting approximately 200,000 tonnes to the U.S. We buy cookies, crackers and other processed products back, but that is not because the wheat price or the flour price is too high, it is because our industry is not turned on properly. That is outside the mandate of the Wheat Board, although sometimes we like to dabble a bit.
What I am putting forward is the goal that every country and every company in the world tries to achieve, and that is this value chain in production. It is the same goal that Tyson's has, starting with the eggs and going right through to marketing the chicken pieces in a restaurant. In Canada, our wheat chain is more closely linked than anywhere else in the world. We start with our farmer and we then go to the marketer. In between the farmer and the marketer, we are linked with the plant breeders, the Canadian International Grains Institute and the Canadian Grain Commission. We are linked directly with our flour millers in this country through an annual negotiation on how best to reflect price, to provide risk assurance, to provide supply insurance, and to provide the varieties they want to mill. We are directly linked to consumers as well through companies like Robin Hood and CSP Foods in Saskatoon.
Our milling capacity in 1996-97 was 22 per cent of the plant capacity. This is not an industry, as Mr. Pizzey suggests, that cannot function with the Wheat Board in place. This is an active and dynamic industry. We were exporting a lot of flour into the United States.
Canada is, by far, our single largest customer, of malting barley which tells us that we are doing a good job. Everyone is linked in the value chain: the farmer, the marketer, the plant breeder, and the intermediate processor. We are currently working with Labatt's and Molson's in an effort to develop a malting barley centre of excellence. The whole industry is integrated in this value chain. You will not see that in many other countries in the world. Again, we have moved from 800,000 tonnes in 1991-92 to 1.2 million tonnes in the last crop year.
While we kept up and even hoped to increase our malting barley exports because of demand in the world, malt exports kept the same pace. This is malting barley that is processed primarily in Western Canada for export into the world markets, premier malt in the mini-customer companies.
Next is a simple indication of the growth in the malt industry. The blue represents Western Canada malt plants and the expansion that has happened over the last couple of years. The industry is clearly not encumbered by the fact that the Canadian Wheat Board is a component of that value chain -- quite the opposite.
We have worked very hard over the last three or four years to try to involve the organic industry more directly in marketing their grain. You will have heard it said many times that, traditionally, organic producers are small farmers, that they develop their own markets, and that they are encumbered by the buy-back process. I suppose the buy-back process is an irritant, but they do not necessarily need to be encumbered by it. Canada must get its act together and put in place national certification for organics. That certification must meet or exceed international requirements. It certainly should exceed the requirements in the U.S. bill covering organics that is currently before the U.S. administration.
We are working with grain companies -- and the Saskatchewan Wheat Pool is the best example to use -- to help them establish centres where organic grain can be collected on the Prairies. The greatest difficulty in marketing organic grain is putting together quantities that can actually meet a customer's 12-month requirement. Japan is an example. The Japanese would buy huge amounts of organic wheat and barley from Western Canada if we could assure them a supply, but quality-conscious people do not want to be going in and out of the market because they cannot get supply. We have encouraged grain companies to designate some of the elevators that are being abandoned on the Prairies as specifically organic, having them certified so that grain can come into the facility and be handled and blended there without losing its organic certification. If I take organic grain into my elevator in Pilot Mound where I farm, it is no longer organic. It loses its certification immediately. You need the facilities to bring the grain together to do that. Sask Wheat Pool is the first player into the game, and it is able to offer producers an initial payment, just like a commercial producer gets, plus a premium that is in the marketplace for organic grain, as well as doing all the marketing and management and assuming all the risk.
Under the current system, where a producer tries to do all of that, they sometimes work with a marketer that will assume some of the risk; but generally the organic grower himself assumes all the risk.
With Saskatchewan Wheat Pool in the business now, N.M. Paterson is considering it seriously. Other pools are looking seriously at designating as organic elevators that would otherwise be torn down. Once there are three or four companies in the business, it will be much easier for the Wheat Board to be able to assure major companies in Japan of a supply of 1,000 tonnes a month of a No. 1 CWRS, 13.5 per cent protein, organic wheat.
We cannot yet do that, but we are very close to being able to. A critical point is national certification standards for organic. We are hopeful that, after many years, we will get to that point before this year is over.
I should like to speak briefly about the buy-back. My farm is located 15 miles from the American border, so I know the pull. The price 20 miles away from my farm is sometimes much better than the pool outlook for any particular crop. Therefore, when a price gets to a point like this, I really want to do a buy-back. I want to sell my grain in the United States to try to make some money.
In reality, that is the market price that the Wheat Board is getting in the United States for durum at that particular time. When the Wheat Board prices a buy-back to a producer, it must price at that level. You cannot create an artificial price to sell to that producer. When the price is down here, they are quite happy to deliver to the Wheat Board.
Organic producers, who have been in the market themselves because they could not rely on the pools to sell their organic grain, because we could not handle it, know how to work the market, so they are buying at a lower price and selling at a higher one. This market is priced off of Minneapolis on a daily basis. All of those prices are made available to producers regularly. People who are doing buy-backs can get a fax every day that shows the buy-back costs exactly. They know exactly what the expected pool returns are from the postings on the elevator walls or from hitting our website. They can calculate whether or not it makes sense to do a buy, back depending on their ability to market into the U.S. market.
However, if they are really good marketers, as many claim of them claim to be, they are buying low and selling high. If they are buying high, they must know that the Wheat Board is doing a better job in that market than they are and is able to recover more dollars in that market than they are. It is likely to be above the expected pool return.
If you open the border and let these producers sell into that market willy-nilly, the red line will come down. It is as simple as that. It is a premium market for us.
Mr. Brian White, Acting Head, Corporate Policy and Market Analysis, Canadian Wheat Board: I want to address a couple of issues that have come up in your hearings to date. One is the notion of an opt-out for farmers. An opt-out is effectively a dual market.
I would also like to talk about the recent developments in Ontario, how the situation in Western Canada is different, and our view on what is happening there.
With regard to a dual market, we must address why we even have this system. What is it in this marketing system that creates value for farmers in addition to what they would get if they were marketing their grain individually? If we are not creating additional value, we must question seriously whether we need a wheat board. We do believe that we create additional value. Over the last decade, as the Wheat Board has come under some scrutiny and attack, we have done a lot of soul-searching about this. We have had to think seriously about what it is in the system that creates the additional value.
It boils down to the fact that prairie farmers have a monopoly over the marketing of their wheat and barley. That is the primary source of value. There are two other things we would identify: one is price pooling; and the other is the partnership with the federal government that the Canadian Wheat Board marketing represents for farmers. However, it is the monopoly that creates the largest portion of additional value.
The fact that farmers have a monopoly over the marketing of their wheat and barley is, as you are aware, a very unusual situation in Canadian society. We currently have two bank mergers in the offing: The first question that comes up in that regard is whether, as a result of that, there will be reduced competition in the market for Canadian consumers.
We have a Competition Bureau and a federal competition policy, yet Western Canadian wheat and barley farmers have had a monopoly conferred on them by legislation. We worry about market dominance in the case of banks or any other sector of the economy because we recognize that that is not a healthy situation for consumers; it puts consumers at the mercy of whoever is operating the monopoly. Yet, we do not seem to be worried about it for Western Canadian wheat and barley farmers. We do not seem to be worried about the fact that we put Canadian consumers and export customers at the mercy of a monopoly.
Even though the monopoly is loosely referred to as the Canadian Wheat Board monopoly, the monopoly does not belong to the Canadian Wheat Board. It belongs to Western Canadian wheat and barley farmers. The Wheat Board is merely the mechanism for operating the monopoly.
If there were only five farmers in Western Canada, we would not need a Wheat Board because they could get together and agree to share the markets themselves. However, the reality is that there are 110,000 farmers in Western Canada and there must be a mechanism to bring them together to exercise the power that was given to them under the legislation, the power to extract extra value from the market.
What is the whole point of this marketing setup? First, it is to make more money for farmers and the farm community in Western Canada. Who could argue with that? That is a laudable goal. Second, it is to market grain in an orderly fashion; in other words, have an intelligent and planned approach to marketing grain and a strategy for marketing it every year. Third, it is to ensure that farmers do not carve each other up for the same sales; in other words, to ensure that they do not compete with each other, in either the Canadian market or the export market, but to have them stick together and hold out for a better price.
As Mr. Hehn said, there is a tremendous concentration of power in other parts of the grain sector. This is a mechanism to allow farmers to have some power themselves.
It is arguable that Canadian consumers, being subject to the results of this monopoly, are somehow disadvantaged, just as we would be if we were subject to a monopoly of department stores. However, we have a very good public policy rationale for having this system: it is the notion that we can make more money for farmers and farm communities at a virtually invisible cost to Canadian consumers given that the value of the raw product in the price of the end-use -- a loaf of bread or a bottle of beer -- is minuscule. Therefore, we can create this monopoly and create a bit of additional value for farmers, and consumers will hardly notice the difference.
If these three things create additional value for prairie farmers, what would a dual market or any type of opt-out do? By definition, it would do away with a monopoly. That goes without saying. We would lose the primary source of value for farmers in this marketing system. We argue that pooling and pool accounts would be gone shortly thereafter. You would no longer be able to offer the service of pooling. We know from experience that, in a situation where an open market coexists alongside a pool, farmers will transfer between the two. In other words, when the open market price is higher, they want to sell and deliver to the open market; and when it is lower than the pool's return, they want to sell and deliver to the pool.
However, the pool will ultimately incur a deficit. That is the experience of the late 1930s when the two systems existed side by side, and that experience is still relevant today. Nothing has changed that would make that experience less instructive in 1998. The worst year in that period was 1938-39, when the pool accounts ran a deficit of $61 million because, throughout the year, open market prices were lower than the Wheat Board initial payment so, naturally, farmers delivered to the Wheat Board.
We would argue as well, although this could be a matter for some discussion, that there would be pressure to take certain federal government involvement in Wheat Board marketing away if the two systems coexisted side by side. The other Canadian grain companies would argue that they do not have a level playing field. The Wheat Board borrows money with a federal government guarantee, but the UGG or the Saskatchewan Wheat Pool do not have that guarantee, so they would argue that that should go. You can anticipate that kind of pressure. In fact, there would be a good deal of pressure to get the federal government out of grain marketing.
Once you take away monopoly, which you take away, by definition, with a dual market or an opt-out, and once you take away pooling and the connection to the federal government, what is the point in having a wheat board? There is no point. There would then be no purpose whatsoever in having a wheat board.
Mr. Hehn referred to how our customers perceive us. I would simply say that we should not ignore the evidence of success. The market and consumers tell us that the Wheat Board is regarded far and away as the number one supplier to the world market.
We could talk more about the concept of a dual market or an opt-out later during your questions, and I could elaborate on those then. However, that could be a fairly lengthy argument.
The Ontario Wheat Board is in a different situation from the Canadian Wheat Board in the sense that their primary market is their domestic market, the Ontario mills, and also CIDA, the Canadian International Development Agency. The U.S. is a residual export market for them, and that is not the situation for us. Nevertheless, if Ontario continues to implement what the delegates have recommended in Ontario, there is some question as to how long it would be before they would need to create a continental market -- in other words, how long it would be before the domestic mills in Ontario would insist that they get the same treatment in their ability to buy Ontario wheat as U.S. mills. Once Ontario is in a continental market, they might as well go to a fully open market. Basically, those are two of their biggest customers, the domestic customers and the U.S. customers.
In Western Canada, we are in a somewhat different situation. We are marketing about 1.5 million tonnes of wheat to the U.S., consisting of 300,000 to 400,000 tonnes of durum wheat, and 1.1 tonnes of milling wheat. We are marketing about 700,000 tonnes of malting barley to the U.S., as well as some feed barley. If farmers were allowed to opt out or freely deliver into the U.S., as is proposed for Ontario, there is no doubt we would suffer a loss of premium prices on U.S. sales. Farmers selling into the U.S. market would drive down prices in the U.S. market, and that would have a transferable impact in the sense that it would drive down U.S. export prices, which would ultimately have an impact on our export prices. Depending on the volumes sold into the U.S., we might be facing either a closure of the U.S. border by the U.S. government or, as in 1994-95, a quota on how much Canadian grain could be exported to the U.S.
We are also worried about Canadian wheat being trans-shipped through the U.S. to other export markets, some of which pay a large premium to buy Canadian wheat. The Japanese are now paying a premium of $45(Cdn)/tonne over the competing wheat, Dark Northern Spring, 14 per cent, in order to buy Canadian wheat and have security of supply. That $45 a tonne would act as a tremendous incentive for some grain company to simply trans-ship Canadian wheat through the U.S. market and compete with us in Japan. Remember, the whole point of this system is not for us to carve each other up or compete with each other for export markets, but to work together.
The other problem is that, because we market according to a marketing plan and we earmark quantities of high-quality wheat for certain customers, if we did not have control over the marketing of that high-quality wheat and some of it were going into the U.S., we would run into a situation where high quality wheat would be sold into the U.S. sometimes at a lower return than we could have achieved, say, in Japan. We would end up shorting the other high-quality markets like Japan, and that would undermine Canada's reputation as a reliable supplier to customers.
The fact of the matter is that the Wheat Board does sell, into the U.S., substantial quantities of grain at premiums and it does capture higher value for farmers than they would capture themselves if they were to market individually. That is a fact. Sometimes the impression is left that we are not in that market or that we are missing that market. We are not missing that market. The key with the U.S. market is not to kill the goose that lays the golden egg. It is a premium market. We can be in it up to a point, but once we get towards that point we start incurring political pressure, and everyone knows that. We need to sell into it up to the point that the U.S. can tolerate but not beyond and, hopefully, not incur quotas or closure of the market. We do sell into the U.S. and capture higher value for farmers, and there is some question in my mind about why we would want to give that up.
The Chairman: The question of monopoly certainly arose quite often in our hearings out west, and probably most often, the matter of choice and dual marketing. What I hear from local farmers with whom I meet is this: Monopolies have worked for the banks, and they are making record profits. Monopolies have worked for the grain companies, whether it is the Saskatchewan Wheat Pool or the Weyburn terminal, and they are all showing record profits. They have shown record profits in the first quarter again. At the same time, the farmers, with the monopoly they have, are fearful about what the future will hold for next year. We have lower grain prices today than we had seven, eight or ten years ago. In Macoun, Saskatchewan, fuel went up another cent a litre as of Monday morning. On our own farm, we delivered 535 bushels of grain to the Weyburn terminal. It brought in some $3,500. The freight rate and handling charges on that grain was $1,570, and we got a small cheque for approximately $1,700. The farmers are asking what the monopoly is doing for them compared with other monopolies.
The oil companies are doing well. In 1972, a barrel of oil was $2, and a bushel of wheat was $2. Oil has fluctuated up to $26, and now it is down. There is no comparison. Our input costs are up.
I was speaking to representatives of ADM in North Dakota the other day in regard to canola prices. They project canola will drop from the $9-a-bushel range to $7. They predict the same thing will happen to flax. I want to hear your comments on this. I realize this subject is not directly related to Bill C-4 and yet it is part of what our farmers are facing on the Prairies and it is very serious.
Mr. Hehn: Mr. Chairman, you have touched on an area I could spend a considerable length of time on, but time is at a premium this morning.
At one point we had a two-price system in Canada because there was a monopoly that could administer that. Canadians decided some time ago that the pricing mechanism should be transparent, and that our processing plants should be fully competitive with our U.S. counterparts on the basis of the raw product ingredients so they could then stand on their own two feet to see if they were better at processing, economically.
We moved away from the two-price system and we are now pricing on the basis of a fully transparent Minneapolis price. Every mill knows exactly what that price is every day and it also knows what the backoffs are, relative to the other mills. We are competitive east-west as well as north-south. As a monopoly, we could charge more for that grain, but that would not be healthy for value-added in Western Canada.
The best we can do is charge what world values are giving us. Under the new world trade rules, the world would look highly unfavourably on us charging domestic processors more, because they would then consider whatever we export to be dumping. We would then run into a trade problem as well.
The real problem is the government intervention that still occurs in the marketplace. There used to be direct government intervention by way of export subsidies, and an element of that still exists. Barley is a prime example of this now. Today, the European Community has an export subsidy on barley that equates to ECU 47 per tonne. If you convert that to Canadian dollars, we are in the $65 to $70 range subsidy per tonne. I will tell you what that does to price.
Last October or November we were selling to the Saudis at world values in the order of $135 to $140(U.S.)/tonne f.o.b. Vancouver. Today we would be lucky to get $85(U.S.)/tonne f.o.b. Vancouver. A big part of that would be the export subsidy, but an even bigger part of that is because of the blue box mechanisms that the European Community now has, which is what they call "decoupled support" which encourages production at home. Barley production has gone up in the European 15, the major producing countries, by 22 per cent since 1993.
At the end of January, the European Community found itself in a position where they had to export the surplus. There is nothing else they can do with it. At the end of January they had only moved one-fifth of their surplus. They had to do something about that. They put on a ECU 47 export subsidy which drove down world values.
The main culprit is what encourages the production. Barley production has gone up 22 per cent since 1993, and wheat production has gone up 24 per cent since 1993. The total estimated EU support for cereal grain in 1998 -- and this is what the farmer receives, which is decoupled, and he does not have to produce to get it <#0107> is $422 per hectare. That works out to $90 per tonne, given their production capability.
They had a high restitution price because their internal price was high. When the World Trade Agreement came along, they reduced the restitution price by 19 per cent. That drove down the floor price in Europe. A parallel support mechanism kicked in which guaranteed farmers ECU 250 per hectare as a decoupled blue box payment. The initial reduction was 29 per cent, now the commissioner is talking about reducing it a further 20 per cent. Parallel to this, he is talking about moving this support to farmers from ECU 250 per hectare to ECU 300 per hectare, which is a 22 per cent increase in the decoupled payment.
You and I are both in the farming business and we know how capital intensive that is. Any time you give a farmer over $400 a hectare in this hand, he will plough it back into what he knows best today, which is produce. He will buy fertilizer and chemicals and all the rest of it, and part of it will be capitalized in land.
That is a long response to your question, Mr. Chairman, but I do not think we can expect single desk selling to overcome some of those barriers. Over the years, single desk selling has allowed farmers to compete in these markets, but farmers have taken the hit of export subsidies. It has allowed us to sell, but farmers take the full hit in terms of the final return.
If you study our pool return outlooks for 1998-99 versus the pool return outlook we are in now in 1997-98, you will find that quite a spread is developing. A good part of the spread is because last year world production was at an all-time record of 608 million tonnes. We forecast for this year something in the order of 585 million tonnes. We had an all-time record last year, and we will have the third largest wheat crop in the world's history this year. Canada is one of the few countries that has reduced seeded area and reduced production to overcome this supply-demand problem. The issue is much bigger than single desk.
The Chairman: The other major issue is freight rates. Especially in Manitoba and eastern Saskatchewan, the freight rates were the issue. Many farmers are reporting up to 40 per cent of their delivery is taken in freight and handling charges.
Mr. Hehn: Again, we are talking about a level of government support that was removed in 1995. Farmers in Western Canada have virtually none of the decoupled support, with the exception of the small amount of money that goes into research and into the NISA program. Other than that, the indirect support to equate with this $420 per hectare in Europe is non-existent in Canada.
I must be very careful with freight rates. I was a witness at the CTA hearings and, even though we have settled with CN, we still have the case with CP, so I must be very careful that whatever I say this morning cannot be used publicly to sway opinion one way or another in the CP case.
Having said that, there is a ceiling in our freight rates in Canada, because we do have the compensatory rate, and the rate is cost-related, in other words it covers the variable cost plus a 20-per-cent variable as a contribution to fixed. There is a ceiling. If you equate that to the Burlington Northern rate, you will find that our rate is much lower. Mr. Geddes alluded to that, and it comes into the offset. If we move to the fully free market rate, we would be in an even worse situation.
The Chairman: The comment from our farmers is that when they receive a product, whether it is a car, a washing machine, or a piece of machinery, they pay the freight on it. Why do they have to pay freight on their product going out? There appear to be two standards.
Coming through the airport the other day, one of the guards stopped me. I should not say this, but he said, "You have been doing a pretty good job, Len." I did not know who he was, but I thanked him for that. The Senate really takes the credit for it. He said, "Why do we have to pay the freight on everything we buy, and when it comes to freight going the other way, the producer pays? It just does not work."
I have talked to the organic farmers. If they ship a container of wheat to Europe, the buyer pays the freight. They are selling grain as high as $10 a bushel. Will that change, or how will this work out for them?
Mr. Hehn: You have touched on an issue in Western Canada that is the least understood issue of all. On Canadian Wheat Board settlements, we are up front with all the costs. On all the other products that move and are traded, the deduction from the futures price establishes the cash basis. For Canadian sales, it is reflected up front and deducted.
This also relates to the freight back-off we are taking off the price when we price for the domestic market. One offsets the other.
Mr. Geddes: The most difficult issue we deal with when we talk to farmers is in trying to explain how the system works.
When we market grain, it is priced f.o.b. Vancouver. For many customers paying a price equivalent to a DNS 14 per cent, the price on April 15 was $243.89. We may have pushed it up to see if we could negotiate a better price, but world customers know that this is the value. That is an f.o.b. value.
Most customers pay the freight from there to their countries. Sometimes you will do cash and freight business where you will actually pay the freight right to the country, but it is built into the price and based on that price.
What a farmer understands, and I understand, is that the same tonne of grain sitting on my farm is worth $243.89, but in reality it is not. If I live in Swift Current, it is worth $189.82 because it costs me to get into a position to sell it. In effect, if the Wheat Board wanted to and the computer systems would allow us to, we could establish a value for each class, grade and protein break on grain at every country point in Western Canada. The customer would pay the freight from thereon. What is not understood is the freight calculation and the fact the customer pays that freight to get it to that price f.o.b. Vancouver.
Mr. Hehn: The grain is always worth the most in the international market at what they call the f.o.b. position, at the point of loading into the customer's vessel. On a cash insurance and freight contract, it is worth the most at the customer's mill door.
If I can use an analogy to help sort this out in your minds, let us say that you are a customer of John Deere and you buy a combine. The combine is worth a lot less at the manufacturing plant than it is once you have it on your farm so that you can use it. The same applies to wheat. Wheat is worth a lot less on the farmer's farm, but once it gets to the customer's mill door, it is worth a lot more. The difference is the freight, the carry charges and the insurance to get it there.
That is tough to explain to farmers because they see the deduction on their ticket. What they do not see is the deduction when we sell to the mill. If you could show those two together, the problem would be over, but we cannot.
Mr. Geddes: With regard to this freight deduction, it is difficult for producers to understand the buy-back process or a producer-direct sale when they buy grain back from the Canadian Wheat Board and deliver it to a customer domestically in their own truck. The freight is deducted off that. The freight is deducted to determine the value of the grain at that location. That money does not go to a railway because it never went into a railcar. However, producers are saying, "Who got that money deducted from our cheques?" Nobody got it. It is simply a mechanism to determine the relative value for that tonne of grain in its location in Western Canada. It is the same as malting barley delivered to a malt plant in Biggar, Saskatchewan. The freight is deducted from the relative value established in Vancouver to give that barley its value on the farm it was grown on. No one got the money.
Mr. Hehn: We could clear all of this up by moving the basis from Vancouver or the St. Lawrence to a country point. When we establish an initial payment, we would do it by virtue of every country point with the freight already deducted. From an administrative perspective, it will probably be more difficult than that.
If this does not clear up very soon, I think I will recommend that to our people because I think it would clear up a lot of this.
Senator Spivak: With respect to freight rates, we heard from Harry Enns in our hearings. He described a situation where a farmer from Swan River sends two freight cars down, and one of those freight cars is the cost of the freight.
Freight rates in Manitoba have gone up about 39 per cent. I do not know whether that is the case all over, but I know the Estey Commission is looking at that. You appeared before the commission. Perhaps you could tell us what you recommended.
Is a 39 per cent increase a fair increase for CN or another company to charge? If one looks at what has happened to CN, the shares went from $22 to something like $80. They are making a lot of money. Is that a fair price? Is that a fair charge?
I read an article in the paper where big through-put elevators are coming on stream, and the trucks are going to these elevators. First, they think there is a problem because there may not be enough supply and this may not be a good thing to do, but they are asking for subsidies for the roads because the trucks are ruining the roads. It seems to me totally illogical to take subsidies away from the railroads. I think Ralph Goodale said that he will get every cent he possibly can to subsidize those roads. That does not seem logical. Of course, CN now has a straight line down to the Mexican border.
First, what is your feeling as to the future of that sort of rationalization of rail for the cost of freight rates? Will that help us?
Second, what is your feeling about what the railways are charging? Is that fair?
Third, what did you say to the Estey Commission, or what is your feeling as to what the government should do about it? It does not seem logical to me that the government should subsidize roads, having taken the subsidies away from the railroads.
Mr. Hehn: Those are good questions. Again, I must be careful about what I say here because I was a witness and the case is not over.
You touched on precisely what is the challenge for the Estey Commission. I cannot honestly judge what is fair and what is not fair because I have no idea with respect to their cost structure and revenue relative to other commodities.
CN's annual report gives you some feeling for that, and in their last annual report, which just came out, the revenue from grain on a per-tonne-mile basis is greater than the revenue from sulphur, coal or fertilizers. That is just revenue and, in all fairness to CN, I am not familiar with their cost structure, so I cannot make a comparison. On the 39-per-cent increase to which you alluded, I hope that is not what they said, because the Manitoba freight rates went up something like 139 per cent, not 39 per cent. You had a situation before 1995 where the government was covering 52 per cent of the rate, and the farmer was covering 48 per cent. Then the entire 52 per cent support payment was removed. We then had the freight adjustment factor, the FAF, because the pool accounts were covering the cost of the water freight. The railroads get paid for going east to Thunder Bay, which is where most of Manitoba's grain goes. Then $16 to $18 of water freight added to transport the grain to port position. The pool accounts used to absorb that entire water-freight cost. We have moved a portion of that water-freight cost back into the country to approximate the relative cost of the freight to the St. Lawrence position, which is now our pricing position for the initial payment.
The 52 per cent of government support was removed, which more than doubles the rate, and then the FAF equivalent kicks in.
Mr. Geddes: In my personal experience in southern Manitoba, on our feed barley, the freight deduction on my cheque went from $18 a tonne to, this year, $43 a tonne. That is the impact to which Mr. Enns refers when he speaks of the situation in southeastern Saskatchewan and southern Manitoba.
Senator Spivak: I do not know why farmers should grow grain, then. If they grow it, they will have to give it to the hog farmers at a much lower rate, I am sure, than what they can get on the international market. Will the new configuration of the railways, following the buying up and all of that, lower freight rates? Where is the hope for the future?
Senator Robichaud: It is a very good question, but we are studying Bill C-4 here, and that question has to do with transportation. I do not know where we are going.
Senator Spivak: The farmers' frustration is being blamed on the single-desk selling of the Canadian Wheat Board. All I am trying to suggest, as the Chairman did, is that we must consider the other factors. We heard many times that the Canadian Wheat Board is not getting a good price for the farmers and that, if those farmers individually marketed their grain, they could get a better price. What is the truth of it? That is why I asked the question. Maybe I should stop there and give other senators an opportunity to ask questions.
Senator Stratton: You alluded to the fact our hearings in Western Canada were similar to those respecting the gun control bill. You also stated that we should get on with the passage of this bill. It was amazing to hear the variety of opinion across the west as well as the vehemence with which those opinions were stated.
It comes down, ultimately, to a question of choice. You have tried to show us why it has to be single desk, but the fact is that the question of choice will not disappear, even with the passage of this bill.
For a little background, the Ontario Wheat Producers' Marketing Board has, through their delegate system, suggested that they can market to the U.S. That decision will be made shortly. I would like you to explain to us how, if that occurs, the Wheat Board can still demand and have a single-desk marketing system? We should also consider what has occurred in Australia, with their wheat board equivalent, and the fact that they have a choice. I know there are different circumstances there, but the western producer still sees that occurring, so their question to us has been, and will continue to be, "If it is working there, how can you tell me it cannot work here?" We are faced with those two dilemmas: the Ontario Wheat Producers' Marketing Board dilemma, and the Australian one. The problem may be all perception. Nevertheless, that perception exists.
Harry Enns was right that Manitoba must get into value-added, although it will not solve the problem completely. Senator Spivak does not necessarily agree with having so many hogs in the province, but hogs, beef and chickens will surely help the farmer immensely. I think we must continue to follow that direction, because we are talking about the economic survival of the farmer. When you consider those very high costs of transportation, which seem to be escalating right out of sight, a certain desperation sets in on the part of farmers who ask, "What over choice do I have?" That is why people are going to jail. How would you respond to the farmer who is willing to go to jail? It seems we are facing civil unrest.
I would appreciate if you could go back to the Ontario Wheat Producers' Marketing Board question. How can we, as a panel, say to farmers that they must go single desk, while Ontario can have the choice to go dual; and how do we explain that in light of what is happening in Australia?
Mr. Hehn: Let me begin by very quickly reviewing the single desk from an operational perspective. First, let us start with the premise that elimination of the single desk does away with the benefits of the single desk. Thus, you have the loss of benefits. We have studies that confirm what those benefits were.
The second important factor is that it puts the elevator managers in a position of conflict. They are buying for our account, and they are buying for the company account, so we would be in direct competition with the elevator companies.
The third factor is that the government guarantee on initial payments and borrowings would come under pressure because the companies would immediately say that the playing field is not level.
The fourth, and probably most important, concern is that pooling would not be sustainable in Western Canada. Later, I will get into why it would not be, relative to the east.
Fifth, internationally, we are a big organization. We deal in a global environment, and we require a critical volume of business to finance all of the support mechanisms necessary to deal in that kind of an environment. We must have some of the best market intelligence in the world, and we do. We must have some of the best market surveillance in the world, and I can tell you that the Wheat Board has the best surveillance in the world. We have been to Cargill and ConAgra and have seen their systems. They have good systems, but ours are better.
You must have market development and technical support. We have that in spades because we do it as a team here in Canada. You must have financial backing. As I have said, we are one of the biggest players in the world when it comes to finances. You must also have an information technology hub in Western Canada, given all the transportation, logistics and capacity problems. Again, we are the information technology hub for Western Canada.
For example, the year 2000 computer problem will cost our organization approximately $13 million to fix, and it will be fixed by November or December of this year. That is just one example.
If you start to reduce the volume, you start to impact on all those services and you are no longer the marketer you used to be.
As Mr. White mentioned, the Ontario situation is quite different from ours. In Ontario, the main market, the premium market, and the market to which they sell their best-quality product, is the domestic market. Every time they sell a tonne of grain to the domestic market they are adding value to the pool by driving the pool average up. The U.S. market is the lower-value market. Therefore, every time they sell into the U.S., they are actually pulling the pool down a bit.
The situation in Western Canada is quite different. Because in Western Canada we only sell to the U.S. very high-quality products -- other than a small amount of feed if we have a frost -- the U.S. market is a high-value return for us, so it bumps up the average pool return, especially when competing in highly subsidized areas of the world which Europe is targeting. Therefore, it is a different situation. By removing the U.S. portion of our sales from the pool return, we are actually pulling the pool price down as well as tending to pull the world price down because the world price is established in the U.S.
However, our most important concern is trans-shipment. With a $40 premium, Canadian wheat moving into the U.S. from Western Canada, on an opt-out provision such as Ontario has, would end up in Japan or Korea, or even England or Italy. That would pull down the premium we are able to extract.
When negotiating a contract with the Italians, the Koreans or the Indonesians, you do not want someone outside the room with Canadian wheat in their pail. There is only one direction for the price to go in, if that happens. That certainly has implications on the pool return.
Further to the Ontario situation, Minister Goodale and Minister Vanclief both received a strongly worded letter from the Ontario Flour Millers Association. The point of the letter is that there is no longer a level playing field, that they are treating the Ontario millers differently than they are treating the U.S. millers. You cannot have it both ways. You either have a single desk or an open market.
This game is not yet over in Ontario. It may be just beginning.
Senator Whelan: It has not even started and I do not think it will get off the ground.
Mr. Hehn: The Canadian Wheat Board versus the Australian wheat board is quite a different situation. If we were an island country like Australia, a dual market would work. However, we are not an island. We share our border with the world's largest wheat exporter, and that is why we have farmers in jail. Policing that border is very difficult, and policing an opt-out might be even more difficult.
Australia is an island and does not share a border. They operate a dual market on the domestic scene only. They still have the single-desk for export and the Chairman of the Australian Wheat Board has told me that Australian farmers are not ready to give that up. There is great support for single-desk for export in Australia.
The other big difference about Australia is that virtually all their harvested grain ends up in commercial position. They do not have a constricted handling and transportation system.
Our country system in Canada has a capacity of about 5.5 million tonnes. We put about 37 million tonnes through it per year, so it must turn seven times. In Australia, all that grain goes to commercial position. Everyone can see it, everyone knows what the quality is, and there is no competition to gain access to the commercial system in order to price the product, which is the case in an open market.
As well, their bulk handling system up to this point in time was largely state-owned. The people who own the elevators are not doing the marketing, which is quite different from the situation in Western Canada. The people who own the elevators are also marketing all the other products, so they would be in competition with us.
Those are the major differences. I do not know whether I have answered all your questions.
Mr. Geddes: With regard to the Australian board and producers having the choice to sell directly to the industry, in the North American milling industry, as soon as you allow a pricing mechanism that is different or lower for Canadian domestic millers, trade stops immediately. It is either that or you open it all up. There is not the option to go halfway by letting the domestic industry in Canada operate outside the Canadian Wheat Board. If we did that, a flour mill which has a fairly good market in the U.S. would stop shipping to the U.S., because all they have to bid for wheat to source it for their mill is the expected pool return, not the Minneapolis price.
The Chairman: I was reading this morning that in Australia votes of producers are allotted on the basis of their production. In Canada, 80 per cent of the production is done by 20 per cent of the farmers, as we have heard again and again.
Would you comment on the fact that Australian farmers are allotted votes based on the number of tonnes they grow?
Mr. Hehn: That may relate to the equity they have in the large fund they have built up and how they will transfer that in terms of public ownership.
With all due respect, Mr. Chairman, I think it would be wrong for employees of the Canadian Wheat Board to suggest to you how the selection process should take place. That is between you and the farmers. I believe that it would be a conflict of interest on my part to give instruction to you on how that election should take place. You people must sort that out.
Senator Stratton: I find rather disturbing the fact that there exists so much unrest. Yet, you are quite prepared to live with that unrest.
Mr. Hehn: As Senator Spivak said, the unrest is largely due to the subsidies and to the transportation problems. I do not think that will be fixed by pulling that key stone out of their archway to the world. That will only complicate the problem.
Senator Stratton: Despite the fact that Australia is an island, does their equivalent to our Wheat Board not still market at least 80 per cent of their grain?
Mr. White: Australia has an export monopoly. They simply have a deregulated domestic market. You are putting your finger on a potential political problem. I do not think anyone is downplaying that, if Ontario goes this route. We are cognizant of that problem and of the unrest.
Our view is that this bill will presumably pass and that we will have a new board of directors, 10 of whom will be elected by farmers. That will give Western Canadian farmers, themselves, the opportunity to sort out how they want to handle this. We are fairly confident that, when the farmer-elected members of the board of directors come to Winnipeg, they will be impressed with the job we are doing. Whether that will deal with the unrest is a more difficult question to sort out. However, it is up to farmers to sort this out.
Senator Stratton: If, for example, the new board, in its wisdom, decided to go to choice, have you done any preparation to that end?
Mr. Hehn: We have done all kinds of in-house work. We have not looked at any particular system. If the new board instructed us to do that, we would certainly do it. There is this whole notion of an opt-out for a three-year or a five-year period. All of those things, I think, may be somewhat workable, except for the policing of them. While they might sound good on paper, having spent my lifetime in the business and having seen it from the farm end, from the elevator company end, and now from the Wheat Board end, I do not think they are workable over a period of time. Ultimately, the system will break down. That is a personal opinion.
I can tell you that, whatever that new board of directors suggests to staff and whatever direction they give them, the staff will carry out what the new board wants.
Mr. Geddes: The point Senator Stratton has raised is critical. As an employee of the Wheat Board, it is distressing to see the degree of angst that exists in the farm community now. We hear about farmers who deliberately let their livestock starve to death or farmers who deliberately abuse their families or their bankers or themselves because of the pressure in the farm community now. To some extent, it relates to the farmers who are prepared to commit civil disobedience because they think they might be able to salvage their operation by doing that. This causes us a great deal of distress at the Wheat Board.
In this particular debate, it is important to understand the degree of misinformation that has caused some of that angst. I only quoted two presenters that you heard in the Prairies over the last number of weeks to show you the degree of misinformation that is out there about the Canadian Wheat Board. We desperately try to go out and talk to farmers about what is real and how the system works. Our first obligation is to market the grain, but more and more we are increasing our communication efforts. You must balance that against our responsibility under the legislation, and that is to market grain.
Senator Hays: I would appreciate an elaboration on what is happening in the U.S. in terms of subsidies or subsidy equivalents.
We talked about and directly to the deep division. It is troubling. Essentially, it has its roots in the fact that, for many producers, growing wheat and barley is just not profitable. The Wheat Board brings that market signal to the producers, and some of them would like to shoot the messenger. Of course, the board is more than the messenger, and that makes it even more complicated.
Being from Alberta, I listened very carefully to the Alberta position. To get right down to it, they do not want the Wheat Board. Some think it might serve well as a dual marketer, and others think it will not. However, they have become convinced that that risk is worth taking and, if the board goes, the board goes. We would then be living in the real world and not subject to the incentive of the board. The board's success is what they are worried about, because it continues to encourage production of a commodity or commodities, namely wheat and barley, that are not viable for many producers. They believe that if we delivered all the durum to the United States, we would be rich. Of course, we know that is not viable, but I think they believe that. I do not.
You have good surveillance, good intelligence, and you have given us the details of European subsidies. I would like to know what we are facing in terms of U.S. subsidies. That is the issue. We attended a conference in 1985, hosted by the then president of the European Union. That is a long time ago, and not much has changed since. We went through a process of identifying subsidies and bringing them down. In the end, what was red is now green. There are more ways to skin the cat than we can imagine, but we are still stuck with the European common agriculture policy as well as the American agriculture policy.
At the root of this is this issue is the plain fact that we cannot make money growing these commodities but we are encouraged to grow them because of our strategy. How long should we continue that strategy? We have provided scenarios where the WGTA no longer exists. We are playing by rules that we want the world to play by, but the world does not seem to be playing by them. Can you give us some details on what the U.S. is planning to do relative to the European subsidy on grain production for the coming year?
Mr. Hehn: On the export subsidy side, the U.S. still has their export enhancement program, but they have not triggered it in recent times. They do have, under world trade rules, the option of triggering it and going to 64 per cent of the previous level. That tool is still there. Canada, of course, does not have anything of equivalence. The only thing we did have was the Crow rate, and that is gone.
In terms of the blue box or the indirect support, the de-coupled support, it is still about 65 cents per bushel U.S. per year. Farmers get it in two cheques. It is part of the Freedom to Farm program. It was established for a seven-year period, and there is some factoring back as we move in, but that will remain until the year 2003. The U.S. farmer is still getting 65 cents per bushel U.S., basis his trim-line yields and his area seeded, no matter whether he seeds wheat or barley or not. In Canadian dollar terms, it is approximately $1 per bushel. It is the difference that our farmers are experiencing right now. If they had another $1 per bushel, they might not be quite so upset.
The U.S. puts a vast amount of money into transportation. They have one of the best road networks and one of the best water systems in the world. All that is handled by the U.S. corps of engineers and the national budget. Call it "green box," call it whatever you want, there is significant support on the transportation side which has been downloaded to our local municipalities and authorities, whether it be the province, city, town, municipality or county.
On the pricing signal side, you are right, farmers do not like to hear bad news. Farmers were telling us, about eight years ago, that the board must give them a better market signal, that not enough market information was being conveyed. We said, "Okay, we will put out a monthly price signal, and we will start doing it two months in advance of seeding the crop itself."
We are the only country in the world that gives farmers a price signal two months in advance of seeding the crop. The problem is, when you get into a year like this, and start to give them what the world market is suggesting might be a final realized return, nobody likes it. People are saying that we must do something about this, that perhaps we should get rid of the Wheat Board because they are not getting value out of the marketplace anyway.
It is really government intervention and increased production in the world that is putting the pressure on the price. I do not know what you do in that area. We have an obligation to give farmers those price signals and we are doing that. However, the more information provided, sometimes people do not like to hear the bad news.
In terms of the situation in Alberta, especially with respect to barley, it is different. I would be the first to acknowledge that it is different at this forum. It is different because, like the Ontario wheat producer and the Ontario Wheat Board, in barley, the domestic market is such a big, mature market for the Alberta barley producer. In fact, in the southern part of Alberta, the market is so mature that it has become a feed deficit region and, as a result, it has the highest barley prices in the world. That is good for farmers. We would not want to interfere with that. The situation is a little different. They do not believe they are giving anything up, because they have got the best market in the world right at home. It is a big part of the one of their options or one of the tools in the tool box.
In Saskatchewan, some of Saskatchewan barley is now moving into the feed deficit region in Alberta. The only market that many Saskatchewan farmers have are the two ribbons of steel because of their vast production capability. We can double the hog population or double the livestock population, but it will not make a big dent in the production that we still have to move to export.
In terms of our wheat sales, if you add the durum and the milk wheat together, the domestic market is roughly 2 million to 2.4 million tonnes, including the export flour, the overall market is still around 10 per cent. We do not have a mature or large domestic market for the farmers to fall back on.
I sometimes use the analogy of the Manitoba pork situation. To remove the single desk in Manitoba pork was quite a different situation, because the farmers market is still very much that packing plant. Even when the single desk was removed, the farmer still had that packing plant.
A farmer can do it in two ways. He can either deliver it directly or work through Manitoba Pork, who negotiates with the packing plant. The fact is, his market has not gone away. Remove the single desk, and you are talking about putting a cargo together for Japan of one grade, one protein level, 40 chemical residue tests or more. You are talking about getting it there on time, all of the letters of credit and the financial arrangements to get it there. It is not something a farmer can do on his own. It is a different situation.
Senator Hays: My second question is: Who should be on the board? There are to be 14 board members and a president. If a majority of the board came from one province, would that be an aggravating issue?
Mr. Hehn: The larger issue, Senator Hays, is the balance. Some regional representation must be there. Again, I am getting out of where I should be commenting on these things, but I will do it because of my personal background.
The business is a global business and so the directors must make decisions that are in the best interests of the business. I sat on a cooperative board for 22 years, and there is always the pressure to make decisions at an operating level. There is always the local pressure. The pressure would almost reach a point where directors wanted to decide which elevators had loading spouts for hopper cars and where the construction would take place.
A good board of directors must be concerned with the business itself and with making decisions that are in the best interests of the corporation and the services that the corporation is applying. There will be times when conflict will come in regionally, provincially or locally. Achieving a balance is the best way to resolve conflict. If there is too much regionalization, the result will be a political board. Decisions will be made with regional interests in mind, and that is not good.
The fact that you have five outside directors which the government will be appointing, if they are handled properly, and if these people are appointed for their expertise, there will be some balance. You can then afford to be a little more regional on the elected side.
Senator Hays: An international firm does your audit and you are happy with it, I understand; I am sure they do a good job. There may be some confusion on this point and perhaps you can confirm it and comment on it. It seems to me that the people who want the Auditor General involved do not want him involved to do the audit, because the Auditor General does audits for Crown corporations. I am not sure whether he is authorized to do one for the Wheat Board, but he would not do it any differently than your accountants would, and would report to you, and that is done in the case of many Crown corporations, or some at least.
What people want is value for money or a comprehensive audit. I should like to know the Wheat Board's position on that, whether it was done by the Auditor General, or another auditing firm. In particular, I would ask you about any reservations you might have about that being done, in the context of something to compare it to, and if there is nothing to compare it to, then it is just a fishing expedition, and perhaps would not be useful. I would appreciate a comment on that.
Mr. Hehn: That is a very good point and one which has been discussed and debated.
We have a very sophisticated system of comprehensive auditing at the Wheat Board. We organized ourselves much like any corporation did back in the early 1990s, and we set up an internal audit committee. The Chairman of the advisory committee is also a member of the internal audit committee. We are thinking of putting an outside person on the internal audit committee as well to give it even more transparency.
We do very intensive, comprehensive, value-for-money audits at the Wheat Board. We have completed a comprehensive audit of the sales group and the sales department. We have done one on export finance and one on human resources. We are currently about three-quarters of the way through a comprehensive audit on communications and our communications involvement. In each one of these, we involve a lot of outside expertise. Sometimes, they come from Toronto, but Toronto is not the only area in the world with expertise in these areas. Currently, the person we have on the comprehensive audit for communications is from Vancouver. He is, in my view, a very good person who has spent a fair bit of time in the forest industry and the fishing industry. You know about all of the problems there. Many of the things he has encountered in communications are not unlike what we are encountering at the Wheat Board. We do value-for-money audits now. We have a comprehensive auditing process, and we have an internal audit committee, like any other business entity.
In terms of the Auditor General auditing the books, the pressure has always come from the fact that they want to see the sales contracts.
This is the annual report for last year. As yet, it has not been tabled in the House. This is probably a more comprehensive document than you will ever get from ConAgra or Cargill. However, you will not get Cargill's. It includes just about all the information you would want.
We have not included all of the appendices in our report this year. Formerly, we covered our history over the last 10 years and the markets in which we dealt. We will make that publicly available as a separate document. We felt the document had too much information in it from the point of view of our competitors. They could pretty well decide what our game plan would be just by studying the document.
There are two reasons for withholding information in any business. One is customer sensitivity. If your customer does not want his price revealed, and you do that, you will lose that customer.
The second reason for sensitivity is competition. Eaton's does not tell Sears what they do. You do not want a situation where the Wheat Board is telling the U.S. Wheat Associates, the USDA or the U.S. Commodity Credit Corporation -- which is a very big single-desk operation on the credit side -- anything about their business.
We have been transparent, in my view, in every respect, with the exception of what is sensitive to the customer and what we consider to be, as administrators, sensitive to the competition.
Getting back to the Auditor General, first, when we become a mixed enterprise, I am uncertain whether we could legally use the Auditor General.
Second, this is a very complicated audit. If you ask Deloitte & Touche, who are known worldwide, they will tell you that this is one of the most complex audits in their portfolio. The reason is that the audit must be so exact. We do not have working capital. We do not have the luxury of moving payments forward, moving payments backward, or adjusting last year's accounts. Our account is final. Each year we close the books and return all of the profit or equity back to the farmer, right down to the last penny. We then borrow money to start the next year. It is not unlike winding down a company totally, returning all of the equity, and starting a new company.
If you add into that the risk management involvement we have, whether it be on the exchange-rate side, the export-finance side, or the marketing side, it is a very complex audit.
I would only ask this question: Does the Auditor General's department have the resources to walk right in and do our audit? I do not know.
As a person in charge of this business, whenever I change an auditor, I must ask myself: Do they have the people, the resources and the capability to perform this complex audit? If they do and if they can satisfy me as an administrator that they can get the job done on time, I would be prepared to consider them.
I would have them compete with Deloitte & Touche and then let this new board decide who is the best when it comes to value for money. If we are talking about a value-for-money audit from the Auditor General, I think you have to leave that to your board of directors, like any other company does, and develop the trust that I am talking about.
Senator Stratton: The whole purpose of the performance audit by the Auditor General related to the question of trust that you mentioned. The level of trust does not seem to be very high on the part of the farmers with respect to the Wheat Board.
It is not that they would come in and do your audit for you. I do not think that is the intent. What they would like the Auditor General to do is, aside from the normal audit, come in and do a performance audit and tell the farmers what areas can be improved upon. That would build the trust back into the system. I would recommend that the board ask the Auditor General to take on that specific task.
My next point is rhetorical but, nevertheless, it must be put on the record. The CEO must, of course, come from Western Canada.
Mr. Hehn: I do not think there is anything in the legislation to suggest that.
Senator Stratton: I am asking you the question: If we are selling wheat from western grain producers, should the CEO not come from Western Canada?
Mr. Hehn: From the point of view of how big this business has become, I think we have to hire one of the best CEOs in the world. If that means going outside of Western Canada or Canada then so be it.
I might have just put myself out of a job, senator.
Senator Whelan: I wish we had heard you people before we had our hearings out west. You have given us information about your operation which would have been helpful.
I was reprimanded by one of my colleagues when you were referred to as "monsters" and "animals." My God, you look pretty normal to me today. I have not seen you for quite a while, but you look pretty well the same as you did years ago.
Mr. Hehn: I have been called worse.
Senator Whelan: I did not think it was proper. They continually said -- and I am sure you have read some of the transcripts -- that they wanted farmers. I said that I thought I knew Lorne Hehn and Earl Geddes as farmers running the business of farming.
We have the impression that there is tremendous dissatisfaction out there, but when you check the votes for the advisory board, you will see that about 90 per cent were in favour of supporting the Wheat Board.
With regard to the individual who represented the Canadian Wheat Growers Association, I could not believe where he got his funding. I was appalled and shocked to discover that even John Deere and other big companies were funding the Canadian Wheat Growers Association.
I want to ask a follow-up question to those of Senator Hays and Senator Spivak.
I think we have been given a "snow job" on the subject of subsidies and that we have not been told the truth about the World Trade Organization and so on. I read many of the farming publications. They do not lay it on the line, as you did today, about the European subsidies, the threat the Americans pose with their powerful legislation that they can use anytime they want to, and the tremendous subsidy by the U.S. Corps of Engineers for transportation. Many people do not realize that 80 per cent of the grain that gets to the ports on the west coast of the U.S. gets there by barge. The U.S. Corps of Engineers is involved in that to the tune of millions of dollars per year. Yet, we harshly condemn the Manitoba farmers, who are hit the hardest by the high freight rates.
I recently read an article by the editor of The Manitoba Co-operator about hog production. He says the figures that Minister Enns gives are unrealistic, that they will never reach that point of production, and that, even if they did, the returns are very uncertain.
Have we moved too fast compared to the European Community and the Americans in cutting back subsidies to farmers?
Mr. Hehn: I think we have perhaps misread the impact of the decoupled support. People in trade discussions get caught up in them. The approach was that we must get rid of this direct support because it affects price; and that is true. Export subsidies are simply price discounts; there is no other way to describe them.
I think we did get a snow job. We were not really cognizant of the fact that the grain farming business is a capital-intensive business, and any time you give these farmers a separate cheque totally decoupled from production, it will have some direct impact on how they farm, what they seed and how much they grow.
When we were in the trade discussions -- and I say "we" because I have to accept some responsibility because, while I was not with the Wheat Board, I was there for the mid-term review and the hot and heavy discussions in 1989 and 1990 when some of these principles were being hammered out, and when there was the argument about red, amber and green boxes which resulted in the development of the blue box -- we had the understanding that, at the very worst, European production would stabilize. I do not think anyone believed it would go down very much, but we were at least left with the impression that it would stabilize. It has not stabilized. Wheat production has gone from 83 million tonnes in Europe in 1993 to the point where we are forecasting 100 million tonnes this year. Barley production has also gone up 22 per cent since 1993. This indirect support is having an impact, even at today's very low values. The only ones adjusting appear to be the Canadian and the Australian farmers. Thus, you have the single-desk systems in the world reacting to the world marketplace, and you have all the free marketers going the other way. I have a real problem with that. That is why I think that we have been misled to some degree.
Senator Stratton: I have a supplementary question.
Senator Whelan: I object to your interrupting.
Senator Stratton: This is important to what we are discussing. I have a letter dated April 9, 1998, from a Congressman from Montana, Mr. Rick Hill, to the U.S. Trade Representative in Washington. In that letter he states that, as the sole representative from Montana, he has heard time and time again from the grain farmers about how Canadian grain dumping has undermined the viability of his home state's agricultural economy.
When we talk about subsidies, we are faced with a real problem of perception across the line. How would you respond to that?
Mr. Hehn: They have done five audits on us in the last five years, and none of that can be substantiated. I do not know how much further we need to go.
Senator Stratton, you have to accept that those audits were conducted by them, not by us.
They have now asked our government to consider whether we would be receptive to the United States doing a complete audit on our milling wheat sales, including third-country sales. Why should we open our third-country sales up to the biggest wheat exporter in the world?
Senator Stratton: I do not disagree with you, sir.
Mr. Hehn: You have my ire up with that letter.
Senator Stratton: The idea of subsidies is what has my ire up, because it is not right. They would quickly slam the door on us.
Mr. Hehn: The U.S. politicians want to weaken us, and the easiest way for them to do that and to make us less of a competitor is to weaken the Wheat Board.
The Chairman: Are the witnesses available to come back after lunch?
Mr. Hehn: I am not, sir. I have a flight out at 2:30. I would prefer that we carried on to 12:30 or so.
The Chairman: The problem is that other senators have questions.
Senator Whelan: I hope you do not limit me to less time than my colleagues have had.
One thing that was brought up many times at our meetings was that the Japanese objected to single-desk selling, to the Canadian Wheat Board's operation. We were also told that they strongly objected to the inclusion clause in the legislation. Has that kind of representation ever been made to you?
Mr. Hehn: I am not sure I am following the question. Are you suggesting that the Japanese were lobbying against some of these things?
Senator Whelan: That was the impression I got. It seemed to me they were actually interfering in what we were discussing.
Mr. Hehn: We have never received that sort of interference, nor has it been an element of the discussions we have had with them. The Japanese concerns have been: supply, supply, supply.
We have also had a problem with quality in the last three or four years. We have not always been able to give them the level of quality they want in, for example, durum wheat. They would like a little higher protein, but we simply have not been producing enough of the higher protein wheat. We sent a signal to our plant breeders to increase protein, and that will happen.
They have also been very upset with the problems we have had in transportation in recent times. They want the product when they want it. Their plants are becoming more modern. They cannot afford to wait three or four months for product. However, we have not heard what you suggested, senator.
Senator Whelan: I have always been a strong supporter of orderly marketing and single-desk selling. The people who run the Canadian Dairy Commission are appointed by the government, as are those who run the National Farm Products Marketing Board which oversees the marketing of eggs, chickens and turkeys. I cannot see how they could operate efficiently any other way.
I remember the Economic Council of Canada saying that the Canadian Wheat Board marketing was the epitome of marketing compared to the marketing system in the dairy industry and the poultry industry. The Economic Council said it was the best in the world.
As I have said, we should have heard from you people before the committee travelled. Our marketing system is superior to any other in the world, and you have confirmed that again today. However, there is great misunderstanding about the system.
I have attended hundreds of meetings across Canada throughout my career and never before saw provincial ministers take the stand they have on this, especially in Alberta and Manitoba. I could not believe the way in which they were pitting one part of Canada against another. There are so many things involved here.
You talked about the flour-milling industry. That industry is mostly controlled by foreign ownership, is it not?
Mr. Geddes: In the last 10 years, a large part of the Canadian industry has been purchased by U.S. companies.
Senator Whelan: You talked about our storage system for grain. Is it not correct that there is only one government elevator left on the Great Lakes that is not controlled by Americans? I believe that it is at Cornwall or Brockville.
Mr. Hehn: Yes, if there are any, there would be only one or two.
Senator Whelan: You spoke about the trade in the flour-milling industry. I believe that Archer Daniels Midland controls at least 80 per cent of the flour-milling industry in Ontario.
Mr. Hehn: It would not be quite that high. It is closer to 55 per cent.
Mr. Geddes: The capacity utilization of ADM in Canada is roughly 50 per cent of Canadian domestic flour milling.
Senator Whelan: We have talked about electing directors and you have stated that it will be up to the government to decide how that is to be done.
Is my understanding correct that representatives of the Ontario Wheat Producers Assocation will not appear before this committee?
The Chairman: I talked to the Chairman of the Ontario producers. He told me that 100 delegates participated in the decision and that the decision was made in a very democratic way.
Senator Whelan: That is not what I asked you, Mr. Chairman. I asked whether they were prepared to appear before this committee.
The Chairman: They said they were willing to talk to us by telephone but were reluctant to appear.
Senator Whelan: We should have a public hearing to hear the producers, as we did out west, so that we treat all producers the same.
Those meetings were gerrymandered. The producers paid no attention to what was happening. It is inconceivable that they would do that. Then, every time I went to a meeting, I was confronted with what Ontario is doing. I believe that the wheat issue is only a speck of fly manure in a manure pile, but I know that it can have a drastic effect on the principle of orderly marketing and the guarantee of what the Canadian Wheat Board has done and will continue to do.
Senator Fairbairn: Many of my questions have been answered. In these public hearings we have heard from a great number of organizations and individuals. There is no question that everyone involved wants the very best that we can offer for agricultural producers in this country. As well, we all want to do whatever our system is capable of doing to protect them from some of the difficulties inherent in the international marketplace.
There is no question that subsidies will continue. It is not only a question of money; in some countries it is a question of history and social issues. No matter what an international trade agreement may say, I cannot conceive that the countries of Europe, with their history of war and starvation, will not maintain a degree of subsidization at what they feel is a protective level.
The United States moves from a different perspective, but it also holds tools. It has tools other than those discussed today. Mr. Geddes mentioned a couple, and we have experienced them. We vividly remember the incredible angst which quotas created not so long ago throughout the farm community in this country.
I come from very close to the Montana border. We have read letters from politicians from across the border. As long as things are in balance, everything is fine but, on the turn of a dime, we have accusations of dumping and fierce demands for closing the border.
Of course we did not hear all the farmers. Many farmers are busy being farmers rather than coming to parliamentary committees. Others do not come because they are apprehensive. However, we have heard a great deal about the word "choice"; about being able to decide what to do. Some say you can have that choice and that the Wheat Board, although it will change, will continue to exist to deal with all the issues that arise in the export world. Others do not give a hoot if it continues.
There are farmers in the country who seem to think that they can overcome these difficulties of quotas, of borders, of subsidies if only they can get the freedom to choose the direction in which they want to go.
If the Wheat Board ceases to exist, if it is allowed to drift, if it is allowed to cease to be the strength in the international marketing field that it has been, there will never be another wheat board in Canada. If the quotas come and the borders are closed and the subsidies are there and the market is poor, who then will help our farmers? Where will they go? Will they go to the commercial companies? Will that be their future source of assistance?
Without the Wheat Board, will our farmers become their own international operatives through a Cargill or ConAgra or whatever? Is that what the choice will be for Canadian farmers? I think we must be concerned about that because there are two sides to the coin of choice.
Senator Spivak raised the matter of freight rates, and that is a very important question. We were told during our hearings by some, including the Minister for Agriculture from the Province of Alberta, that we should not deal with this legislation until the Estey report is in. Others have told us that this bill should be passed to allow the new system to get on to work for the farmers. Are you able to express a view on the question of the importance of the Estey report vis-à-vis the passage of Bill C-4?
Mr. Hehn: On the last question first, unless I am missing something, I do not see a direct correlation here. The transportation issues are separate and apart from the single desk and pooling. Some people like to suggest that the board is too involved in car allocation and we do not let the grain companies manage their assets. This committee is likely not aware of this, but the board convened a meeting about a month and-a-half ago and convinced the trade to move to zone allocation. We have will have 12 zones in Western Canada, and that will give the grain companies full freedom to manage those assets. If there was an argument, Senator Fairbairn, at one time, that might have related to this, that has, by and large, been removed, or will be removed this summer.
Starting August 1, the railroads will be in charge of making up the trains. We currently build the trains. We take the off-boards and on-boards first. We add Wheat Board cars to the trains because we are the biggest shipper. In the future, the railroads will build the trains, and then the situation will be reversed. They will take the Wheat Board cars and build around those with the off-boards and the on-boards.
Having said that, we are allowing the same element of flexibility, even going to 12 zones from over 200 train runs. We still have a flex formula which we put in four or five years ago. Last year we put in a formula which relates to performance. No, I do not think the transportation issues have much of a relationship to the bill.
On the question of subsidy, something has just occurred that I should mention. When we went into the trade negotiations over that nine- or ten-year period, the whole understanding was that we did not want to tamper with a country's right to be self-sufficient, but a country has no right, in achieving that self-sufficiency, when their producers overproduce, to dump that in the export market and drive prices down. When we looked at things like decoupling, it was with the understanding back then that this decoupled approach would simply guarantee that Europe could remain self-sufficient. I think all of us as negotiators believed that, by decoupling this from production, they would not overproduce and dump in the market. History has shown that we were wrong.
We will always have subsidization. Every country has a right to be self-sufficient. We do not want to enter into that political debate. The difficulty around this whole question of choice is that there is no sunset clause. There is no fall back. We must live with whatever we do for a long, long time. It is important that we work through this carefully and methodically and ensure that we have done all of our homework.
In terms of who will fill the void, you are already seeing that, senator. You already see the large investment that is going into Western Canada. That is who will fill the void. They are already preparing for the time when we are gone.
I think I have answered your question.
The Chairman: On the question of choice, my understanding from the minister who appeared before the committee was that the question of Alberta opting out was in the courts and that legally, according to constitutional rights or whatever, they would have to take an exceptional position in order to opt out. However, if Alberta were to opt out, is that the end of the Canadian Wheat Board? Certainly, that was the position the minister brought to the committee.
Mr. Hehn: Well, it is certainly the end of the Canadian Wheat Board as you know it today.
Senator Whelan: Are you aware of the statement made by Thomas Jefferson?
Mr. Hehn: I am not that old.
Senator Whelan: During the American revolution, Thomas Jefferson said, "Let no other nation tell another how it shall be governed." How far they have detoured.
Senator Fairbairn: I appreciate your answer, and of course we are seeing it. There are different ways of taking over countries. The production of one's food is one of the absolutely fundamental political tools for the freedom of a country, both historically and today. We do have cause to worry.
Senator Stratton mentioned the emotion and the angst. We all feel it, including you. One of the difficulties is that we have reached a point where, in some instances, there is no dialogue left. There is no debate. There is a determination that there is only one way to do the job and that it will work. I have great concern about how our country will function if we imperil the economic success of a major instrument.
Mr. Hehn: In response to your observations, we do a fair bit of survey work. In all of our survey work, there is no question that, if I felt that the Wheat Board were still going to be there and were going to be effective, I would support it. That element is growing in terms of the ratio.
What is not growing and what seems to be shrinking is that nobody wants an open market, or very few want an open market. At least the number that wanted an open market five or six years ago has not been growing. Perhaps that is the way to put it. That is very encouraging.
If we can provide choice without damaging those pillars, we should look at those things. We will provide some choice in terms of the way we price. We have already provided some choice in the way we originate. We originate quite differently now compared to the old, rigid quota system. There is significant choice there.
Senator Fairbairn: There is choice embedded in the bill.
Mr. Hehn: Remember, with a handling system capacity of only 5.5 million tonnes, if you had an open market, not everyone can access the system when the prices are the best. The system has to turn seven times. How do you handle that? It is hard to handle it by regulation. What would happen is that, in the fall, when the production is up, the basis would widen and the farmer's return would go down. Towards June, July, when the supplies dried up, the basis would narrow and the farmer's value would go up. However, the poor young farmer who needs the cash the most would be subject to the low price, and the well-healed farmer would get the best price. That is the kind of thing that pooling bridges.
Senator Fairbairn: It also depends on what you grow and where you live.
Mr. Hehn: Yes. If Alberta is outside of the board, they are closer to Japan, and no doubt if they were growing high protein wheat, they would be in a position to service the Japanese market. The impact of that on the Saskatchewan producers might be serious. We are Canadians and we ought to be tackling these things from the view that the whole is greater than the sum of our parts. That is the Canadian tradition.
Mr. Geddes: One thing you will know for sure is that the Alberta Grain Commission will offer 1 CWRS 13.0 to Japan and so will the Canadian Wheat Board. We will both be trying to sell. We will offer $5 below the Alberta Grain Commission to make the deal and they will come back and offer $5 below us. Pretty soon we will sell at the PNW DNS 14 price, not $45(Cdn) above it. That is what you will have.
Senator Spivak: If there were one thing upon which there were almost unanimous opposition, it is the contingency fund, made up of check-offs by farmers.
I want to know the reasoning behind the contingency fund and what your view of it is, because I cannot understand why the government now wants to move towards part of the operations of the Wheat Board being guaranteed or underpinned by the farmer.
This committee was shown a graph -- and I cannot remember which witness showed it to us -- where, if you looked at the farmer's gross income, it had gone up, but if you looked at net income from 1971, it had not budged.
Why would we want, at this point, especially since those of us who are supporters of the Wheat Board want to counteract what is a real hijacking of a certain kind of political process, a situation in which farmers would then have another reason to be irritated by having a check-off on the contingency fund? Why can we not have the government set up the contingency fund? I say this without prejudice: If we can guarantee $1.5 billion for sales of nuclear reactors to China, to ensure that our nuclear industry here is kept afloat, why can we not guarantee the farmers the contingency fund?
Mr. Hehn: That is a political question. There is no question, in my mind, that there is an element of concern out there in terms of the check-off. Because we would be going to an elected board, we would be seen as a mixed enterprise. In that respect, the government has already said that they are no longer prepared to underwrite the adjustment, the interim and the final payment process. However, all of the guarantees would remain intact, and that is established in the proposed legislation.
Senator Spivak: What is the reason?
Mr. Hehn: I do not have the reason. Perhaps you could put the question to the minister. However, it relates to the mixed enterprise and the fact that the government is no longer involved in the business on the finance side.
Having said all that, Mr. Goodale, when he appeared before the committee, also said that we do not have a history of a deficit relative to adjustment payments.
When we went to farmers for the last four or five years, they wanted four things. First, they wanted more accountability; and second, more flexibility in our services, particularly in our pricing provisions. In a nutshell, they wanted their money faster.
The third thing they wanted was an ability to deal in niche markets, as they call it. The buy-back allows for that. The fourth thing they wanted was transparent pricing in the domestic market. We have come 100 miles in that direction.
When we allow more flexible pricing provisions, which is simply, "I want my money faster," there are some risks attached to that. When a farmer delivers, he gets a partial payment, which at the beginning of the crop year is probably about 75 per cent of our expected final realized price. As we move into the year and our confirmed sales versus our unsold portion shifts, we will then move that partial payment up to the 85 per percent, 90 per cent mark; and ultimately, in July of the selling year, we can probably get it up to 95 per cent of the final realized value.
Farmers are saying that they want that to happen faster. They want the government out of that because it takes too long with our Order in Council process. The farmers have asked for this speed.
The government is saying, "If you want it faster, and you do not want to go through these parliamentary hoops, you must accept some of the risks." The contingency fund covers that.
Farmers are saying to us, especially the young farmers -- because of the costs, they make a tremendous commitment in spring, with virtually no idea in terms of how they will cash-flow that commitment: "In terms of some of the other crops, we can now go to a grain company and we can confirm a forward-pricing contract. We can buy the fertilizer, we can buy the chemical, and that is all related to the contract." What they were asking us is: Can a vehicle be established with some similarities to that, prior to seeding or at seeding time? We said, "Yes, we can; we will look at that." Of course, it will be up to the new board if they want to go to that direction. The cash trading option allows for that kind of flexibility.
Senator Spivak: The minister asked us, apart from the election, to talk about the contingency fund in terms of recommendations. Many people have spoken about a cap of the contingency fund. I do not really want to ask about that. I am wondering what sort of sum would be necessary. Could you have a one-time fund?
If you are not going to use it anyway, or you have never used it and you might not use it, what sort of sum of money would be needed to put in there so that farmers would not need a check-off for that money?
Mr. Hehn: It is like working capital in a corporation. It depends on what level of risk the board of directors wants to be exposed to. The higher the level of risk, the higher the level of working capital the company will have in place.
It will depend on the level of risk to which the new board wishes to be exposed.
I was to some degree misquoted when I appeared in front of the House committee studying Bill C-4. I was asked the question and, rather quickly, I gave what I think was perhaps not a well thought-out answer. I said that at that time the stock market was see-sawing around 5 per cent or 10 per cent at a crack. I said that, if we look at the variability and the exposure in the stock market we might start to realize that, in the grain market, maybe 10 per cent is not a bad figure. As I think through that, that is definitely high.
The Australian Wheat Board wanted to get their fund up to $400 million to $500 million. Theirs is a little smaller than ours, but they use it for other things, such as capital investment.
I do not have an answer for you, but I do think that, in order to make this a little more palatable, and in order to cement the trust in the government partnership, maybe it should be cost-shared to kick-start it.
Senator Spivak: What would be the mechanism? Would the government simply have to set up a fund?
Mr. Hehn: Right now we have about $6.4 billion in receivables, which is the credit that we have offered to the various countries under the credit program. They all have a sovereign guarantee attached to them. Some have been rescheduled, so the principal is a little farther out and the interest payments are still up front. That account was in excess of $7 billion a few years ago. It is now $6.4 billion and gradually coming down. The amount of wheat we offer on credit now is totally different from what it was a few years ago. However, credit could be a factor in the next year, depending how the U.S. reacts. They have some generous programs.
We are required by trade law to charge full commercial rates on those loans. We have a good reputation in terms of borrowing in the world community. In Canada, we have our own Canadian Wheat Board note. I think we are the fourth largest issuer of paper. The Wheat Board has its own money market desk. We are actually performing the function, just as a bank would, and the government is underwriting the process. We are funding these receivables. We borrow at something like 1 per cent on the commercial rates, and we are charging a commercial rate on the receivables. On $6 billion, 1 per cent is $60 million, and that is why you see $60 million to $80 million each year going into the pool accounts. It goes directly to farmers. It offsets our other interest and operating costs. We can take from that account. Farmers would consider that a check-off in any event because they feel that is part of their earnings over the years.
Senator Spivak: You are not saying there would be an objection to using some kind of creative accounting mechanism whereby the government would put in a one-time sum of money which might be an established contingency fund, which then, if it was never used, could act as a hedge for the risk?
Mr. Hehn: If the government kick-started it, I do not think you would hear too many complaints from the farmers about a contingency fund.
Senator Spivak: I would like to ask some questions on the difference between the Canadian Wheat Board as a marketing agency and the huge export enhancement program that the U.S. has put into countries such as Egypt. I did not quite understand that in the report. How does the Wheat Board have an advantage as a marketing agency over companies such as Cargill in those countries.
Mr. Hehn: That relates to how we can differentiate price given that it is a competitive factor.
Senator Spivak: I want to know why you have an advantage over Cargill or Midland.
Mr. White: First, we have two different objectives. Their objective is to make a margin on the business. The absolute price does not matter to them, whether it is low or high. The point is that they want to buy low, sell high and make that profit margin.
Although the Wheat Board does not buy grain from farmers, we take ownership of the grain in order to sell it. One way of looking at what we are doing is, rather than buying low and selling high, we are buying as high as possible, subject to not running a risk of incurring a deficit in the pool accounts, and we are selling even higher. We are giving the farmers as much money as possible up front, and then we are selling above that. It is important to understand that we have two different objectives.
In terms of how we approach the market, then, we also have different ways of operating. We have an overall sales plan in which we rank all the markets to which we could potentially sell in terms of the attractiveness of return for farmers in Western Canada. We rank all markets in that way. Then we try to sell the maximum we can to the markets that represent the highest possible return. In practice it means that we sell to about 70 different countries around the world.
It is funny you should mention Egypt. We do not sell any wheat at all to Egypt, despite the fact that it is the world's largest wheat importer. The reason we do not sell any wheat to Egypt is because the competition is so fierce between the Australians, the U.S. and the Europeans that the return is not attractive. It is more attractive for us to be in other markets.
Every year, we try to be in the best portfolio of markets for western Canadian farmers that we can be in. Whether we actually achieve the best is obviously hard to measure, but that is certainly our objective. That sales plan is being updated on a regular basis. We are basically selling according to the buyers' willingness to pay for quality.
Some buyers such as the Japanese will pay a premium of $45 a tonne; some buyers will pay a premium of $20 a tonne; and some buyers will only pay $5 a tonne. Some buyers are very price conscious and not quality conscious, and we will basically sell against the competition and not achieve any premium in those markets. That is how it works. We differentiate among the markets according to buyers' willingness to pay for quality.
Senator Spivak: Would Cargill, Midland or others be able to do the same thing?
Mr. White: Suppose Cargill were trying to hold out for a $45-per-tonne premium for Dark Northern Spring 14 per cent with the Japanese. They would encounter 10 other companies willing to sell at a lower price. They would end up competing away the premium that is out there.
This is an important point. You may have heard that the premiums would be there anyway because the quality is in the grain. Farmers and the Canadian Grain Commission quality control system create the quality in the grain. There is no question about that. We do not claim to create the quality in the grain. The Wheat Board marking system makes it possible to achieve the premium for the quality in the grain and to capitalize on the buyers' willingness to pay for that quality. If you had multiple sellers, you would not be able to capitalize on the buyers' willingness to pay for that quality unless those sellers decided to collude. If all those grain companies decide to collude, you would have to ask yourself whether the fruits of that collusion would be passed back to the farmer. I do not think so.
Senator Spivak: That is the advantage of a monopoly marketing agency, and that is the key point. That is not understood, Mr. Chairman, by many of our people.
Mr. Geddes: The reason Egypt is one of the lowest value markets in the world, if not the lowest, is that one man makes the buying decisions. All of the grain that goes into Egypt today goes through his desk. It is the reverse of the Canadian Wheat Board. The buyer has the monopoly and all offers go to his desk. They are beginning to privatize their industry, and we are looking very hard at the top end that is privatized. We may be able to go back in and get a premium over other markets.
The Chairman: There has been a lot of discussion about grain going across the border by truck.
I asked the Saskatchewan Wheat Pool and they could not give me an answer. There were by far more Saskatchewan Wheat Pool trucks crossing the border than there were farmers. They were trucking from the Moose Jaw terminal south on Hwy. 6. Do they pay the same buy-back that the farmer would pay when he takes the grain across under a certificate?
Mr. Hehn: Yes, the buy-backs are established by station, and whatever station they were pulling from, they would pay the same buy-back. In terms of the export licence, there is a period of delivery time, so if they were prepared to run the risk of sitting on that, after they bought it back, for two or three weeks and the price went up in the U.S., they would capture the higher price.
The Chairman: What would be the advantage for them to truck it?
Mr. Hehn: You will have to ask them.
The Chairman: Farmers in our area that took grain down across the line -- and this is when it was $6 a bushel -- sent the cheques back to the Wheat Board, and the Wheat Board paid them $3 and told them they would get the rest of the money out of the pool. Does the same thing happen with the Saskatchewan Wheat Pool and the other grain companies?
Mr. Hehn: The Saskatchewan Wheat Pool pays the value of that grain in that market backed off to that station. They pay that into the Wheat Board pool account. That is exactly the same price a farmer would pay if he were doing the same thing. That is established each day and it will vary by province and by station.
Mr. Geddes: This slide shows the kind of information that is available to producers, the range of prices established each day at Minneapolis for the U.S. market. Those prices are available to producers doing a buy-back, and they are the same prices that a company that had a sale to an elevator in North Dakota or Montana would have to pay the Wheat Board to buy that grain to send it across the border. The difference with the producer is that he is marketing his own grain, and the company is marketing grain, period, so there is a different relationship on how the buy-back works in that case. The producer gets to keep all of the profits, if there is profit beyond that number, or he pays a penalty if he is doing a buy-back when the spot market is above the pool return outlook.
An earlier slide showed that if the producer is marketing and watching how the market is moving and can purchase his buy-back at a point where the cost is less than the pro is going to be or than his return is expected to be, he can make money doing the buy-back. However, doing it in a spot market above the expected pool return is very difficult.
The Chairman: There is a lot of talk of the level playing field in all areas, and particularly in the continental market of North America. We underbid the Americans and the Americans underbid us, and this is not a good situation for our farmers. The rural municipalities of Saskatchewan did a study on an 1,100-acre farm in North Dakota growing durum and wheat compared to one in Saskatchewan. The North Dakota farmer had a $40,000 advantage in income.
Senator Spivak: Do you mean subsidy?
The Chairman: Wherever the money comes from. There is so much animosity by the Americans against the Canadian Wheat Board, as you can see from the letter that was presented here this morning.
This committee has been down to Washington three times and there seems to be a real animosity that has to be dealt with at the border, and until that is dealt with, this will only escalate. How do you suggest that we deal with that?
Mr. Hehn: I do not know how you deal with American politics. I think we have to rely on our Canadian politicians to deal with it. I can tell you this: We do not undercut the American wheat value. Wheat is not a homogeneous commodity. It mills differently and it bakes differently. We have seven different classes now. Our Canadian Western Red Spring class and the Dark Northern Spring class are not the same commodities. Ours is a product and theirs is very much a commodity. For our wheat, the mixing times are much less, so it takes less energy. There are a number of things in our wheats that are preferable to a miller.
Most millers, if they can buy Canadian wheat, will do so because it is so uniform and consistent and because they can buy forward. They will make it the base in their grist. Basically, every miller in the world will have a mix of wheats in their grist, for economic reasons. Even American millers like to make Canadian wheat the base in their grists, and they are prepared to pay a small premium for the uniformity and consistency, and for the fact that our wheat works differently in their plant and less energy is required.
Mr. Geddes: If I might add to that, we do not sell a million tonnes of spring wheat to the Americans because they do not have any, and we do not sell them 300,000 or 400,000 tonnes of durum because they do not have any. They do not have any that meets some of the quality specifications that they can get from Canada. One of our big advantages in the spring wheat side is fusarium. We have less fusarium-damaged wheat than they do. Our durum crop is essentially free of fusarium damage. They are buying it because they get a premium product.
It is the same with malting barley. It is not that they do not have any. Ours is just better. They can get fusarium-free malting barley from us. We have a marketing advantage in that regard. That is why they buy grain from us. It is not because they do not have it. Clearly, the Dark Northern Spring 14.0 milling wheat is as good as CWRS for many applications, but they are buying about a million tonnes of CWRS from Canadian farmers because ours offers them something in their grist they cannot get at home.
Mr. Hehn: The other factor is that we are selling a product. Most American millers will demand a load sample before they will unload the car. That sample is usually forwarded to them before the car arrives. I am talking about American wheat now. They will do a milling and baking test on it, and if it does not conform, it will go off to the export market. They buy from us based on grade description. We do not give them a milling sample, unless they demand it, and that does not have happen very often. It is our class system and our grading system that enables us to do that.
The Chairman: Thank you for appearing this morning.
Mr. Hehn: We appreciate the opportunity. If you require additional information or further clarification, we stand at your service. We would be pleased to return or to forward whatever information you need, by way of fax or e-mail or letter.
The Chairman: Thank you.
The committee adjourned.